Euro is not out of the woods yet
THE worst is over for Europe. That’s according to Nobel prize-winning economist Robert Mundell. The Columbia University professor, who was speaking to Bloomberg, said he was happy with the euro in the mid $1.20-$1.30 range against the US dollar. He said that the $1.18 area, which was the low reached at the end of May, over-exaggerated the risks to the single currency.
But are the risks really so over-blown? No, says Michael Hewson, currency analyst at CMC Markets. “The euro’s strength in recent days is more of a case of the US economic outlook deteriorating, rather than an improvement in Europe.” Weak economic data in the US has weighed on the dollar, which has prompted calls for further fiscal stimulus in the US. “It has also diminished the risk of an imminent rise in US rates in the short and medium term, thus making the US dollar less attractive,” adds Hewson.
This has given the euro some firepower to extend a rally many thought would not last this long. The key level to watch, says Hewson, is $1.2750, a strong resistance level. If this can be breached, then he says that the single currency could well stage a short-term rally to $1.30-$1.32. But traders will need to be nimble since there are still risks ahead for the single currency.
Of course the structural issues of too much debt still exist, especially in Greece, Spain, Portugal and Ireland and yesterday Moody’s downgraded Portugal’s sovereign credit rating to A1 from AA2. Although this is a good few notches above junk status, Duncan Higgins, senior analyst at Caxton FX, says: “More announcements of this sort are expected for some time, which will cause the euro rally to run out of steam before it gets to $1.30.”
One of the biggest risks facing the euro is the result of the stress tests on more than 90 European banks, which will be released on 23 July. Mike Turner, head of strategy and asset allocation at Aberdeen Asset Management, says that the results of these tests could be the catalyst for another lurch lower in the euro: “The European monetary system has been far less coherent in explaining these tests to the public than, say, the US. This has only added to the uncertainty and anxiety surrounding the single currency.”
Turner expects the euro to trade within a range of $1.30-$1.16 for the rest of this year. Hewson is slightly more bearish and thinks the single currency will end the year at $1.12.
The euro might have a Nobel prizewinner on its side, but the next couple of weeks will be crucial for the single currency and any gains could prove to be limited. KP