EURO FEARS MAY WELL BE OVERBLOWN

DIRECTOR OF CURRENCY RESEARCH, GFT

AS TRADING in the currency markets slows to a trickle during the last few weeks of summer and thoughts turn to the beaches of St Tropez and the Hamptons rather than the latest piece of economic news, don’t be fooled by the lull in volatility. Underneath the placid price action rages a debate that is likely to determine the direction of the euro in the second half of the year.

After staging a fast and furious rally from its yearly lows, euro-US dollar has seen a significant correction that has taken the pair 500 points off its recent swing highs. The decline in the euro was precipitated by renewed concerns about growth in the peripheral Eurozone economies. Euro bears argue correctly that while northern European economies such as Ireland may be able to recover from their economic predicament through export growth, southern European economies such as Spain, Portugal and Greece which do not have a competitive export sector, are unlikely to generate enough growth to overcome the steep austerity measures undertaken by their respective governments. As a result, sovereign debt spreads have widened once again sending the euro lower.

Yet even if this thesis is true, the result may not be detrimental to the euro as the market believes. After all, the collapse in the single currency in early May was driven by the very real fears of a possible breakup of the Eurozone. However, after the €1 trillion commitment by EU members towards a stability fund, the risk of fracture in the union has diminished significantly. Meanwhile EU leaders such as Germany and France continue to post better-than-expected growth as their economies outperform the US. Furthermore, euro bulls make the case that Switzerland and Scandinavia, which are not part of the Eurozone but which are critical trading partners of the EU, can offset any drop in demand from Southern European economies.

This week, the economic calendar is relatively light on both sides of the Atlantic, but if the data from core European economies continues to surprise to the upside, the rally in the euro could get a second wind.

Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail borisandkathy@gftuk.com.