DavidBelleFX

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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