To say that the outlook for the Euro was “extremely bearish” at the beginning of 2017 would be an understatement. Numerous research notes had it heading to parity with the USD, based on both economic weakness and systemic political risk. Goldman Sachs Chief Economist Jan Hatzius stated the the Euro could reach parity, driven by divergent Central Bank policies and interest rates.
A lot can change in five and a half months, and the relative appreciation of the Euro reflects this. While the year is not yet half through, downside pressure appears to be lifting.
Economic data from the Eurozone continues to improve and impress. Inflation numbers are improving, and the beginnings of concerns around overheating are starting to appear. At a recent appearance before the Dutch Parliament, ECB President Mario Draghi was forced to defend current policy in the face of some harsh criticism. This type of political pressure will increase within EU member states if it continues down the present path.
Is it time to go long the Euro?
Selling the rally has been a very profitable strategy during this downtrend. A switch to a bullish bias, at least in the medium term, may take place as traders evaluate the shifting fundamental and technical landscape.
Technically, a break above 1.10 may see the EURUSD move higher. I am not a technical analyst, however a quick look at the chart suggests that there is significant potential upside on a breakout.
Immediate political risks have been taken off the table in France and Greece. The overarching fear associated with these shouldn’t be discounted, fear which was putting a handbrake on Euro appreciation.
Fundamentally, continued strength in European data will place more pressure on Draghi to end stimulus. That will be the real catalyst for an explosive move to the upside.
The flip side.
The case for weakness remains over the long term. The structural problems of the single currency aren’t going anywhere, and political or economic instability could rear it’s head at any time.
In the short to medium term, however, a set of circumstances exist that could see the EURUSD move above 1.10, especially if the ECB signals a change in it’s current policy.
Disclosure: the author has no position in the Euro.