16th April - Watch the Euro
20 April 2015
TECHNICALS:
Monthly Euro chart
Having broken the band of
Prior Lows 1.1875-1.2040 there is little to stop the market testing parity where a combination of supports ( the lower diagonals of a small bear channel and a larger bull channel) should be a brake on the Euro bears.
Of course if that level were to break, then 0.85 would be likely and possibly 0.65!
Daily Euro Dollar chart
The market is pausing.
There has been a marked lack of enthusiasm so far to rally back through 1.1098.
And a push beneath 1.0456 would surely signal a renewed sell off….
FUNDAMENTALS:
From May 2014 through to March 2015 the Dollar enjoyed a strong rally against the Euro. From a high of a little over 1.3900, the Dollar strengthened all the way to around 1.0400. It was driven by a powerful combination of US economic strength and Eurozone economic weakness.
As 2014 wore on it became received wisdom that the US Fed would begin tightening monetary policy around the middle of 2015, indeed they laid the ground work for such a move by tapering of their QE3 bond buying program during the second half of 2014.
In contrast, Euro zone growth remained weak. There were growing fears of deflation and calls for the ECB to begin a full-blown QE program to revive growth. Though they cut interest rates down to virtually zero, it wasn’t until March 2015 that the ECB finally accepted the inevitable and began its own QE program.
Expectations were for the Dollar to extend the rally against the Euro; possibly pushing on through par. In the event that hasn’t yet happened. In fact it was the Dollar that corrected as Q1 US data revealed the economy had suffered a slowdown. Although written-off as a weather related event, traders became less certain when March non-farm payroll came in much weaker than expected, leading to speculation the Fed could delay its expected policy move by several months.
All this occurred at the same time as Greece elected a new government with a mandate to end austerity and renegotiate the terms of the international rescue deal with her creditors the EU/EZ/IMF.
Despite initially taking a tough stance, the Greeks came face to face with reality in the shape of German opposition to any concessions that weakened the Greek commitment to balancing their books.
There have been several attempts to agree a new framework, but to date one has not emerged. The chatter running through markets now is one of Greek exit from the Euro followed by a Greek default.
Indeed earlier in the week there was talk of the EU preparing to eject Greece from the Euro if there was no progress in the next few weeks.
So what would a Greek exit from the Euro zone mean for the Euro? And would their be consequences for other Eurozone member countries enduring their own struggle with austerity?
We judge a Greek exit from the Euro would be Euro negative. Traders would probably seek other vulnerable economies to target as exit candidates. It might be like the aftermath of the Pound’s exit from the ERM in the early 1990’s when pressure built on other weak currencies, and although the ERM held together, a fierce battle was fought between policy makers and investors.
But what of the Dollar?
We judge recent US economic weakness will prove transitory, in fact US retail sales reduced Tuesday were just shy of consensus at 0.9%, a strong bounce from Q1 weakness. Moreover the Fed is still likely to begin raising interest rates during the summer.
So a recovery in US growth and a probable Grexit from the Euro could see the Dollar rally further against a troubled Euro..
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24th April - Cable and the election 
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27th March - The solidity of the Dax