FUNDAMENTAL ANALYSIS
FX
Euromageddon! With no economic recovery in sight, this is exactly the type of scenario that may play out in the months ahead if officials cannot contain the spread of this crisis. What started off as an emergency centered on the financing of Greek debt, deteriorated and quickly spread to other EuroZone member countries in the form of contagion over the coming months due to concerns over rising government deficits and debt levels. Te initial 110 billion euro Greek bailout was followed by an additional 85 billion euros for Ireland and 78 billion euros for Portugal, money coming from the European Financial Stability Fund and the International Monetary Fund.
Now, the most recent developments within Italy and their fight for survival may eventually be the reason the euro gets the boot, pun intended. Greece will most likely end up going through a restructuring period during which the euro will lose value, as risk aversion fuels a flight for U.S. dollar liquidity. Te lower euro, however, may save Italy from a similar Greek tragedy. Whatever the final outcome, the euro will - if it survives - not look the same.
ECB POLICY CHANGES
During the most recent ECB policy meeting and press conference, ECB President Trichet made clear their own concern toward the downside risk to growth within the EuroZone. More importantly, his outlook on inflation
also changed. Mr. Trichet believes the inflation rate should fall below 2% next year. He also downgraded 2011 GDP estimates to 1.4%-1.8% growth rate from the previous 1.5%-2.3% forecast. Te market is now expecting the ECB to hold interest rates steady into the fourth quarter. As conditions
will most likely force the ECB to lower interest rates before they increase, the euro will continue to feel pressure.
With Trichet leaving the post at the end of October, Mario Draghi, an Italian, will have to wear the shoes made of cinderblocks. Tis may be
If isn’t
Mario able
to
Draghi bring
confidence back into the marketplace, the Euro’s fall may accelerate.
FX TRADER MAGAZINE October - December 2011 45
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