Euro v US dollar: reading the entrails

by George Hatjoullis

EURThe monthly chart of the EUR (USD per Euro) places this currency pair in context. Even in the depths of crisis when the continued existence of the Euro was doubted by many, the pair failed to breach 1.20. On the upside the pair seems capped by lower and lower highs, forming a declining line of resistance. It is as if the pair is trying to decide which way to go. At some point it will decide and either break the 1.20 floor or it will break above this declining resistance line. It will not stay in this pattern forever although it could stay for some time yet.

The consensus is that the existential crisis for the Euro is now over and it is a matter of relative value. The call by the National Bank of Poland to dismantle the eurozone has not impacted the market and nor is it likely to do so. This does not invalidate the NBP argument. Reading yet again about the North/South divide in the UK one wonders why the NBP argument does not gain more traction. If the UK, which is also a monetary union but with full fiscal integration, cannot resolve issues of regional disparities in growth and development, then how can a monetary union of national sovereign states do so? The market does not care at the moment but this does not mean the market is wise or knowing. It is the same market that loaned money to the likes of Greece at absurdly low-interest rates on the assumption that the loans were somehow jointly  guaranteed by all members of the eurozone, even though the Maastricht Treaty expressly prohibited such guarantees. In the land of the blind the one-eyed man frequently gets trampled.

At the moment the market has dismissed existential issues for the Euro and is focusing on more conventional criteria for valuation. Investors would be wise to close any good eye and go along with this view. Two conventional issues are the German political scene and the pending ‘taper’ of QE by the US Federal Reserve. The matter of the taper has been discussed ad nauseam, but the change in German politics has not yet fully registered.

Angela Merkel is head of the largest party grouping in the German parliament but, owing to the demise of the coalition partners, they are 5 seats short of forming a government. There is no obvious alternative coalition. The widespread assumption is that Germans being pragmatic people, some compromise will reached an another coalition will be formed to enable Merkel to consummate her glory. Then again maybe such a coalition will not be found and if found may lack cohesion. There is some uncertainty and the market, in the guise of the EUR, seems a touch sanguine. This may bring uncertainty back into eurozone debate.