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 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 (deflation and 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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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.
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.