EUR/USD parity within 12 months is a real possibility
Too little too late might well sum up how the markets have come to view actions by Eurozone policy makers to stem the financial crisis threatening to rip the currency zone apart. They give the impression of only ever acting to save their currency when under extreme duress such as when stock markets are plunging and yields on the bonds of peripheral states soar to levels where those countries can no longer viably finance themselves. But each announcement never quite buys the requisite confidence.
This inability to get ahead of the curve is steadily sapping confidence in the Euro and the markets' belief that Eurozone policy makers will ever get on top of the crisis. This time last year EUR/USD was trading around the 1.40 level, recently it's been floating around 1.22-1.23. It's perfectly conceivable that more indecision from Eurozone policy makers, or even outright disunity, will eventually see EUR trading around parity with USD, probably within 12 months. The last time it traded around those levels was between 2000-2002, soon after its launch.
Eurozone policy makers must take a very decisive and united stand to support struggling banks and peripheral countries and then follow through to stop the rot. In fact shorting EUR versus USD is very much a bet on Eurozone policy makers not being able to get their act together. Creating a superstate with centralised powers from a disparate collection of democratic countries, which is what investors are effectively demanding, is extremely challenging, even more so in real time. Something like this has never been done before. The only hope for Euro bulls is down to the very strong political will to save the Euro and keep the Eurozone together.
Of course the move towards parity, if that's what's on the cards, won't happen in one go. There are a number of very strong zones of support, such as around the EUR/USD 1.19-1.20 level and then at 1.09-1.10. Unless the news from the Eurozone is truly dreadful, there are likely to be strong Euro rallies off those levels. Also, it can't be ruled out that global central banks won't take coordinated action to support the Euro should its descent look as if it's getting out of control.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities.