Fundamental Forecast for Euro: Bearish

- Euro officials introduce a European Monetary Fund as a European solution to future crises
- Doubts and reservations over potential bailout options hurt confidence in a strong Euro Zone
- Has EURUSD carved out a meaningful base?

It is not necessarily two different things to speculate on the future of the euro and EURUSD. The sheer liquidity of the pair has an overwhelming influence on the single currency. Therefore, where the US dollar goes, the euro itself often heads in the opposite direction by virtue of its being the market’s favored alternative currency. This a relationship that can play a significant role in price action over the near future as the greenback has tempted a notable decline while the rest of the market has kept to its congestion. However, the sustainability of any trends for any currency will more than likely develop out of underlying sentiment trends. But, this is particularly true of the euro and dollar. For the euro, the moderation of risk trends has been a blessing because the fear that boiled over through the end of January and into the first half of February found an easy target in the instability of the Euro Zone. Should sentiment trends recuperate in the week ahead, the market will have to decide whether the euro’s value as a dollar substitute or the health of the euro-region is more important.

In the short-term, it could actually be relatively easy to distract currency traders and international investors from the euro’s deep-seated problems. As long as general sentiment trends are either stable or improving, Greece will be able to access debt markets and raise funds to slowly work down its staggering deficit. However, should uncertainty and fear prevail; the willingness to purchase the nation’s debt will quickly evaporate. Greek Prime Minister Papandreou has said that his economy does not need a bail out; but rather, they need access credit at “sustainable” rates. Yet, if the market deems the nation too much of a risk, they will almost certainly require a rescue of some sort. Unable to tap the debt markets, Moody’s would likely downgrade the nation’s credit rating and Greek bonds would no longer qualify as collateral for ECB loans – a severe problem come time for the expiration of slackened lending rules.

Should there be a second round of panic focused on this struggling EU member, it is not likely that the issue would pass so easily on mere assurances of action and reiterations of confidence from various policy officials. However, to this point, leaders have not been able to agree on a meaningful and respectable solution. The European Monetary Fund is an option that has found considerable praise. Setting up an institution like the IMF for the euro-region could act as a lender of last resorts and prevent a broad crisis. However, some policy officials like the ECB’s Weber (who said the idea was born from fantasy) say this is unrealistic. Indeed, the program would require funding; and few economies have the capital nor would they want to contribute knowing it may go to a country that may struggle to pay it off. In reality, emergency funds would simply be a temporary fix. Working down Greece’s (and Italy’s, and Portugal’s, and Irelands) debts is the only true solution to secure the Euro Zone.

Change the focus from general sentiment trends to scheduled event risk, there are a range of notable economic indicators; but few of these reports have the necessary influence to dramatically alter the course on the euro. Nonetheless, there are a few highlights that can spark notable volatility and fundamental jockeying. Particularly important will be the Euro Zone CPI and labor costs. Given the financial uncertainty and struggle to cement growth, price pressures are the only thing that can truly raise the possibility of rate hikes in the immediate future. The German ZEW and regional employment data is also good for volatility and fundamentals. But, rest assured, most market participants will be watch the March 15th and 16th gathering of officials to see if any progress is made on a rescue plan.

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