HiFX comments on the Euro’s movements this week
Andy Scott, associate director of FX advisory services at foreign currency specialists HiFX comments on the Euro’s movements this week.
“Over the past few weeks, the Euro has traded not like a currency that is second only in terms of volume to the mighty U.S. Dollar and is involved in more than a third of all global foreign exchange transactions; but rather more like a highly volatile small nation currency such as the S.A. Rand. In fact this week, the Euro has been one of the biggest movers in the FX markets with the percentage change from low to high of 4.5% against the U.S. Dollar. And despite the fact that Greece has rejected the latest set of proposals from its creditors and is delaying IMF payments in a show of defiance, the euro (at least at the time of writing) is broadly higher.
“Whilst the stronger than expected inflation data from the euro zone this week which showed prices rising one again – eliminating fears of prolonged deflation was good news – the euro’s strength caught a lot of people by surprise. Let’s not forget, many of the major banks have been calling for the euro to depreciate even further this year, with some predicting it to fall below parity against the dollar.
“So, is the increased volatility here to stay and is this weeks’ euro strength just a blip? We think that the two factors that seem to be influencing the higher levels of movement in the euro, namely Greece and swings in the price of euro zone sovereign bonds will be with us for a little bit longer, possibly into the summer. It’s hard to believe that with all the deadlines that have come and gone and were supposed to be make or break for Greece staying in the euro zone, they’re still in and we’re at yet another juncture. However this reinforces the desire of both sides to keep Greece in the euro and it’s hard to believe that either side will now seek a ‘Grexit’.
“Our view, contrary to many, is for the euro to strengthen further this year. We expect Greece to be financed for another few years, the European economies will continue to recover assisted by the ECB’s Q.E. and inflation will tick higher. Against the dollar, with the U.S. economy struggling to bounce back from the weak first quarter, as the strength of the currency drags on corporate profits from overseas and manufacturers struggle to compete globally; we expect to see EUR/USD head back above 1.20. Against the pound, with U.K. inflation having turned negative and the economy growing at a slower pace than the Bank of England has forecast, rate hikes are unlikely until well into 2016 and we expect to see GBP/EUR head back towards 1.30.”
