Why isn't the Euro weaker?

FX:EURUSD   Euro / U.S. Dollar
It could be said that it is slightly strange that the Euro isn't weaker. As of writing, EURUSD is trading at 1.1040 after seeing lows of 1.0458 back in February 2015. From March last year until February this year, EURUSD was in a very steep downtrend with a range of ~3500 pips. Since then, the pair has remained relatively stagnant, after seeing a bounce off of the 1.0460 level.

With the Greek situation weighing and another round of Quantitative Easing, you probably would have thought that the Euro would have been much weaker. However that is not the case, evidently. We have 3 fundamental beliefs with regards to this.

1) The market has been poised for a US rate hike for a while. However, to justify a rate hike, consistently strong data has to be printed, but the US has not been able to achieve this as of yet. Combined with this, short term rate differentials would in fact suggest that EURUSD should be above current levels, as well as inflation expectations. These correlations are slightly weak, however.

2) Uncertainty in Greece is causing indecisiveness. Investors do not actually know how Greece will leave the Eurozone, as it has never been done before and there is no real procedure for a country to leave. On the flip side, Tsipras has suggested an extra EUR 60bn to be provided to Greece for the next 3 years. This seems like it would not solve the underlying problem and merely extend the time it takes to pay their creditors. Investors are aware of this. This uncertainty could be causing the lack of Euro weakness. If and when a deal is reached, a rally and fade could most probably occur (i.e a spike in price and then a fall). A good quote for why this situation is taking so long to resolve: 'if you owe the bank £500 it's your problem; if you owe the bank £5m it's their problem.'

3) Many people believed that the Eurozone would be like Japan in terms of reintroducing QE (deflation and QE for a long period of time). However, investors began unwinding short positions when they saw that Eurozone data was actually improving post-QE introduction. This lead to an increase in the price of the Euro which is still having an effect today.

Please add comments. If you agree or disagree, I'd really like to hear it.


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Why isn't the Euro weaker against the USD? This is commonly asked.

1. Draghi started the Euro weakness in May '14 with his hints towards European QE. We went from 1.40 to 1.05.
He started with Covered Bond-QE and followed up with Sovereign QE (announced in Jan 2015).
European QE and expectations of an early US lift off in rates were the real drivers of EURUSD-weakness.
Up to Jan 2015 the SNB supported the Euro massively as well by defending the 1.20 EURCHF.

2. Greece is a minor driver of EURUSD. US citizens often overestimate the meaning of Greece for the stability of the Eurozone.
Important for EURUSD is the fact that Europe does not become a full blown transfer union.

3. Eurozone is an export machine with a positive current account. The US is an import machine with a negative current account.
This creates a constant upward pressure in EURUSD as long as monetary policy and rates differentials do not interfere too much.
If you go for fundamentals EURUSD should be at roughly 1.30.

4. Surprise indicators like that of Citi show that Eurozone is outperforming expectations whereas the US is underperformin expectations.

5. Positioning is very one sided with 80% to 20% in favor for USD longs - that is CFTC data.

My takes:

We have seen a long phase of EUR weakness which is over. EUR should climb gradually to regions of 1.20 to 1.25.
DXY has reached its upper bound. The US will not decouple from the rest of the world.
And the US investment banks will have to adjust their projections of 0.80 / 0.90 towards higher numbers.

Hey thanks for replying. I think all of your points are extremely valid. Number 4 is especially true, however, the US is obviously still on a better track for a rate hike. I think we have to remember that the market is very psychological - if there has been talk of a rate hike for a long time, this will not go away in people's heads too easily!
Interesting commentary, read it in 1 go. Thanks for this :)
DavidBelleFX JasperForex
Thanks, Jasper :)
How about the obvious support at ~1.07 on the EURUSD Monthly chart which was rejected twice (March and April 2015)? I believe that has a great deal of influence on why the euro isn't weaker at this moment. June is an inside bar of of May and for now July is inside of June as well. Fundamental analysis will decide to which side we'll break out of this price contraction, but for me personnally, it's simple price action and support/resistance as to why the euro isn't weaker :)
Thanks for your comment. I think to a certain extent you are correct. However, I believe there are more pressing fundamental issues which are propping up the currency, with possible uncertainty being the main driver for this. When you factor in China to the equation, it does seem quite bizarre that the Euro is not in a very weak state.
Agree, Investors also bought a lot of Greece papers, as ECB was also supporting this and as situation has now changed, a lot of money would blow up if Greece goes. So what to do ? IMO they agree at the end, everybody can go to vacation and the rest will follow end of the year
IMO, I don't think it is so much about the numbers to investors as it would be to the creditors and the Greek people. I think as I said above, it is more to do with the setting of a precedent (whichever way the deal goes (if they exit or accept Europe's terms)) which investors are looking at, and the ramifications this could have for the future - think Italy, Spain.
I completely agree. The negative news seems to be discounted by the market and upside seems probable. Looks like we can use tight stops too.
I think we are in a strange state of uncertainty. IMO China is weighing heavier on markets than Greece (well should be anyway). Considering the Eurozone is one of China's biggest trading partners, I feel that this hasn't been recognised by the market enough. Upside is certainly possible considering it seems all eyes are on Greece, which leads me to believe that people are focusing more on the precedent of Greece leaving rather than the actual numbers involved.
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