The Euro's Downtrend In 2015
The start of the new year sees the Euro and European Central Bank back in the spotlight of forex news. After initial deferment, President of European Central Bank Mario Draghi has confirmed that the ECB is prepared to begin Federal Reserve-style Quantitative Easing measures to attempt to spur moderate inflation and growth. Originally, Draghi wanted to explore other options that seemed like a better fit for the European sector. The President of the ECB is satisfied that these measures did not produce the kind of gains that the Governing Council was hoping for to counter the steady decline of the Euro's value. Speculation puts an official confirmation at the January 22nd meeting of the Governing Council of the ECB.
Most notably, the decision for QE is coming against the objections of Germany and Angela Merkel. Critics have long accused Draghi of caring more about politicking and being the mouthpiece of Germany because he appeared to be so closely aligned with Merkel's economic views for the EU. The choice to pursue QE is seen as a departure from that mind-set. Whether or not this criticism and labelling was fair or justified is an entirely different matter.
The current sentiment of the Governing Council, as expressed in a January 8th release from Draghi, is to focus on mid term strategy and risk to combat deflation. European Union inflation rate data fell into the negatives for the first time since 2009, further setting the stage for an absolute need to push forward with a stimulus strategy in the form of the bond-buying QE program.
This decision is branching from a few important economic factors related to the European sector.
The Overall Value Of The Euro
The Euro has had a hard time competing against other currencies for the past couple of years. The EURUSD, the most traded currency pair, has been in a consistent downtrend from as far back as early 2014. The overall sentiment of analysts is that the Euro may descend as far as 1.14 by the middle of the year. Conservative estimates put that number closer to the end of the year, but still a decline either way.
Confidence in the Euro is shaky as evidenced by Central Bank and reserve manager strategy. In the past, a deep tumble by the Euro would be an opportunity to add to stockpiles for when the currency ultimately recovers. Figures released by the International Monetary Fund indicate that amount of Euro reserves held fell by 8.1% in the third quarter. This figure is notable because it has not peaked over 7% since 2011 when holdings declined far less.
Simply put, reserve managers and Central Banks do not want to hold a currency that will still be tumbling and losing value over the long-term. The decline in reserve holdings indicates that these entities do not think that the Euro is at the bottom; which is a sentiment shared by many other analysts as well as the financial officers associated with the ECB pushing for Quantitative Easing.
Draghi has stated this could be construed as a good thing for the purposes of bolstering the local economy and industry. More money flowing provides the opportunity for inflation and the economy to grow as opposed to the money stagnating in reserves. The removal of the support pillar of reserve holdings may ultimately prove to be beneficial to the long-term health of the Euro and the economy of the European Union.
The Greek Question
A new chapter may be opening in relation to Greece. Previously, the prospect of Greece withdrawing from the European Union was met with gloom and doom; that it simply could not be done without major complications with consumer confidence and economic ramifications. That tone has softened in recent days. Germany was the most vocal about this situation.
An anonymous source allegedly related to the German government has recently stated that Germany have been working on their own contingency plans in the event that Greece did actually withdraw. Draghi's tune has changed to one of a withdrawal being “manageable” as opposed to the “impossible” of last year. Of course, this is purely speculation. It is worth some consideration though, because it does touch on an important weakness that would have needed to be addressed over time.
What would be the fallout of a country withdrawing from the European Union? What kind of effect would it have on other member states or the general economic climate? How would the ECB respond to minimize damage to the Euro and continue to bolster consumer confidence? What would be the effect of the reestablishment of the Greek Drachma?
Many questions with few concrete answers - any of which may be relevant if Greece entertains leaving the European Union in the coming year. Statements by Bank President Draghi do indicate that the ECB is at least prepared for that possibility this time around.
The 2015 Potential For The Euro
Assuming the Euro was existing in a vacuum, one would think that it has nowhere to go but down in the coming year. An aggressive QE bond-buying program by the ECB may counter that. The ECB is focusing on a mid term strategy to help boost growth, counter deflation, and return confidence to the Euro. Draghi's willingness to push against Germany is a good sign that the ECB is less concerned with the individual country's economic health over that of the whole. That criticism has been flung regularly.
That being said, forex traders and investors would be advised to consider the possibility of the ECB finding success with their QE program. In the immediate short-term, the Euro should continue on with its downtrend unless there are some major developments that come out of nowhere. As of January 8th, the Euro has enjoyed a brief spike with Draghi's confirmation that the ECB is willing to push an aggressive QE program. That isn't likely to be the start of a trend reversal without other fundamental circumstances fuelling the fire.
It would not be entirely surprising if the QE program spurred the Euro into at least a range-bound state as Central Banks and reserve bankers stepped back into the picture. That would heavily depend on the number of participants but could also contribute to a reversal.
Long-term Bears, be wary in the coming the months. Short-term traders should continue to enjoy a predictable downtrend for at least a little while longer.