The euro was in a tailspin from May 2011 into July 2012, losing roughly 20 per cent of its value against the US dollar. Break-up scenarios emerged; difficult talk of abandoning Greece or creating a secondary euro became prominent, as no “good” answers existed to stop the currency’s slide.
In July 2012, European Central Bank (ECB) president Mario Draghi stepped in and brought a temporary halt to the bleeding. Draghi promised to do “whatever it takes” to preserve the euro, triggering the Long-Term Refinancing Operation with which the ECB could buy the bonds of troubled nations. This support helped investors gain the confidence to jump in as well. And since then, we’ve seen an amazing turnaround.
But there is a problem. This support has brought the euro up 16 per cent since the July 2012 low. This strength puts pressure on exporters, as higher currency values make it more difficult to export goods. And now deflation is beginning to set in after disappointing inflation readings from Spain and France, and a huge miss from Germany last week.
It may not be the ECB meeting this Thursday, and it may not be next month; but eventually Draghi will have to address this problem. Or else the devastation seen in the beginning of 2012 will look like a walk in the park.
To read more about the European debt crisis, visit http://bit.ly/1iEExYO
James Stanley is a senior instructor of trading at DailyFX.