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Is the Euro headed to a new high or a new low? Check the fundamentals!

Is the Euro headed to a new high or a new low? Check the fundamentals!

2013-03-13 12:10:00
Benjamin Spier, Technical Strategist
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With the Euro trading back near the 1.300 line, now is a great time for traders to review all the fundamental factors influencing the single currency’s price action.

Euro Fundamental Factors

LAST UPDATED

EVENT TITLE

EVENT EXPLANATION

IMPACT LEVEL

EFFECT ON CURRENCY

Mar. 8 2013

Euro Strength

There are worries that the recent 1000 point gain in Euro trading against the US Dollar could hurt European exports. French President Hollande and Greek FinMin Stournaras are among those who voiced concern. Hollande said the government leaders should set a medium term exchange rate objective. The ECB doesn’t partake in monetary easing, and therefore may suffer the effects of the ongoing “currency wars”, which results from central bank asset purchases in countries like Japan, Switzerland, and the US.In March, Draghi refrained from expressing concern over Euro strength, saying Euro rates continue to be near their long term averages. In February, Draghi said he will be watching for effects of the appreciating Euro on inflation risks. The ECB later reported in February that Euro strength is a downside risk to inflation. The recent decline of Euro prices from a yearly high near 1.37 back down towards 1.30 has cooled concerns over the single currency price.

Medium

Any talk from ECB members about acting to cool strength in Euro trading, would probably be Euro negative.

Mar. 7 2013

Monetary Policy

The ECB left the interest rate at 0.75% in March. Following the March meeting, Draghi signaled that Europe's economy will have to worsen before he'll consider cutting interest rates. Earlier in the year, Draghi said that because of lower inflation, the ECB remains accommodative. In February, Draghi said that the ECB is far from considering an exit from current monetary policy. Draghi also said in March, that a rate cut was discussed, but the prevailing consensus was against action at this time.

High

A cut to the interest rate would be Euro negative.

Mar. 7 2013

Economic Growth

The Euro-zone has experienced five straight quarters of economic contraction ending with Q4 2012, thereby entering a technical recession. GDP declined by 0.6% in the final quarter, the biggest quarterly decline since Q1 2009. The ECB predicted in March that the Euro-zone economy will decline 0.5% in 2013, and the EU now predicts 0.3% GDP decline in 2013. EU predicts 1.4% growth in 2014. Draghi also said that the Q4 decline was worse than he expected.

High

Economic growth is Euro positive as it encourages business investments and consumer spending, and it leads to tighter monetary policy

Mar. 7 2013

Economic Recovery

In March, Draghi said in the short term the ECB sees weak consumption, weak domestic demand, but continues to maintain a view of an economic recovery later into 2013.

High

A Euro-zone recovery is Euro positive as it encourages business investments and consumer spending, and it leads to tighter monetary policy

Mar. 6 2013

PMI Activity Surveys

The Euro-zone composite output index reversed direction and declined to 47.9 in February, down from 49.8 in January. PMI for manufacturing was reported at 47.9, PMI services at 47.9. Euro-zone PMI’s hit a ten month high in January, but were still negative. Markit said the PMI’s point to the beginning of a recovery in 2013, and the decline in Q1 should be less severe than the previous quarter.

Medium

Higher PMI's are Euro positive, as they point to improved economic performance.

Mar. 1 2013

Italian Elections

Beppe Grillo’s 5-Star Movement became the strongest party in Italy following February elections, but the parties are stuck in a gridlock as no natural coalition won the necessary majority in both houses to form a government. Center-left coalition head Bersani won the lower house with a majority. Center-right Berlusconi said he is open to a coalition with the center-left. However, center-left Bersani ruled out a coalition with Berlusconi in early March.The center-right parties have expressed dissatisfaction with the current government’s austerity reforms. If the next government repeals current PM Monti’s economic reforms, it could be seen as negative for the Euro-zone’s progress to recovery.

High

If the next government refuses to commit to the previous government's economic reforms, it could be seen as Euro negative.

Mar. 1 2013

Inflation

Inflation set a 2-year low in February at 1.8%, following 2% in January. Inflation is likely to discourage the ECB from cutting the interest rate. The ECB expects inflation to fall below its 2% target in the coming months, and longer term expectations are in line with the target. EU predicts 1.8% inflation in 2013, and 1.5% in 2014.

High

Lower inflation is Euro negative as it allows the ECB to remain accommodative with monetary policy.

Mar. 1 2013

LTRO Repayment

ECB reported in February, that the first payment of the second 3-year LTRO payment is 61.1 billion Euros, about half of the amount expected. Additional payments by European banks will be announced by the ECB every Friday.The Long Term Refinancing Operation loans were provided to 278 banks by the ECB in December 2011. Early repayments were first announced on January 30, and the larger than expected repayment amount sent the Euro higher. Draghi said LTRO payments are a sign of confidence. The accelerated LTRO repayments reduce liquidity in the Euro-zone, and thereby act as a de-facto tightening of monetary policy.

Medium

Higher than expected LTRO repayments are usually Euro positive as it shrinks the ECB balance sheet and thereby acts as a de-facto tightening of monetary policy.

Feb. 25 2013

Greece Recovery

The European Union decided to provide Greece with a 4-part 49.1 billion Euro bailout in December, averting a crisis. Greece agreed to further economic reforms before the bailout. Greece FinMin also said in January that there is no discussion of a haircut. The Euro-area finance ministers approved the delivery of the 9.2 billion Euro tranche in January, the second part of the aid payment agreed upon in December. The two last payments will likely occur in February and March and make up 5.6 billion Euros. The Euro rose on the initial approval of a Greece bailout.Greece GDP fell 6.0%Y/Y in Q4 2012. Greece FinMin Stournaras says the economy could begin a recovery by the end of 2013 on confidence that Greece won’t leave the Euro. He agreed with the IMF forecast of a return to 0.6% growth in 2014. IMF expects Greece to contract 4.2% in 2013. The Bank of Greece predicted in February the economy will shrink by 4.5% in 2013.

Medium

Signs of an economic recovery in Greece are Euro positive.

Feb. 22 2013

German Economy

The German economy is the Euro-zone’s biggest economy and one of the area’s strongest. German GDP declined 0.6% in Q4, following a 0.2% gain in Q3. German GDP only grew 0.7% in 2012, down from 3.0% in 2011.The Bundesbank predicted in February that the German economy will return to growth in the current quarter on improved industrial production. They said a gradual recovery is on the cards for the rest of the year. The Bundesbank lowered its 2013 growth forecast in December to 0.4 percent. The EU predicts 0.5% 2013 growth.

High

Improved German economic growth is Euro positive, as it reflects positively on the growth outlook for the entire Euro-zone.

Ongoing

OMT Bond Purchase Plan

The ECB has decided to provide bond purchases for struggling countries through its OMT plan. The plan is aimed at countries like Italy and Spain which have suffered high yields on government bonds, but the plan requires the countries to ask for a bailout from the ESM permanent bailout fund. Although no eligible country has asked yet for a bailout from the ESM, meaning the OMT has yet to be used, the presence of the OMT plan has still driven bond yields lower in Spain and Italy.

Medium

Lower yields on Euro-zone government bonds are Euro positive, as higher yields makes it tougher for the government to borrow funds and can hurt economic growth.

Ongoing

German Elections

German elections will take place in September. Merkel hopes to return with her right wing coalition against the center-left challengers.

Low

Ongoing

Risk Correlation

EUR/USD is correlated 0.495 against the S&P index over the past year. Meaning, the Euro is somewhat positively correlated to risk trends when trading against the safe-haven US Dollar.Over the past four weeks, the risk correlation has been significantly higher at 0.754.

Medium

Risk appetite could be positive for Euro trading, meaning the Euro might rise along with equity prices and prices of bonds from lower rated governments.

Ongoing

Single Banking Supervisor

The ECB is set to take over as the head of single banking supervisor by March 2014. The implementation of a single supervisor should allow struggling banks direct access to the 500-billion Euro ESM bailout fund.

Medium

The establishment of the single bank supervisor should be Euro positive as it will provide stability to the Euro-area.

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to instructor@dailyfx.com .

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