The Outlook for the Euro

Payroll has been somewhat overshadowed by the continuous stream of events elsewhere, although it remains a focal point in terms of timing for treasury departments. The lack of real progress a week ago, coupled with renewed fears over the fate of Dexia, had the currency under pressure, and this point proved to be a turning point. A key feature of its – and the stock market’s – performance is the fact that it continues to make a positive move whenever a politician or central bank member rolls out the platitudes of continued commitment to Greece and the sovereign debt programme of bailouts for the banks. Until this stance changes, it is likely that the currency will maintain stability and avoid a technical breakdown.

The news of the Dexia rescue has proved this, although a critical mistake has been made in the bailout. That is that they paid a price for the shares to the tune of €4bn, a mistake the UK government also made in 2008. The reality is that many other banks are simply too big and losses potentially too great for the taxpayers of Europe to reward shareholders. It is also pointless, as by the time bailouts do occur, shareholders have normally lost the vast majority of their investment. Investing is all about taking risks after all, and there should be no reward from these ordinary people who neither have the means nor desire to be involved.

Returning to the technical picture, the euro often takes its lead from its relationship to the yen and the fall last week highlighted one of those rare patterns that indicate an exhaustion point. The fresh lows towards the psychological point of par, in combination with momentum rising while price is falling (divergence), suggests that at the very least, a period of relative calm and consolidation is due. For the time being a least, the pressure on the euro has abated.

Figure 1: The Euro/Yen Outlook

Source: CQG



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Mark Carney Bank of England