Politics to Determine EURUSD Direction

At the press conference which followed last week’s European Central Bank policy setting, Mario Draghi offered no hints of any additional forthcoming stimulus measures, which reassured market players’ speculation that the central bank felt that Eurozone’s economy was on track. The EUR/USD pair, according to Draghi, had been trading at its long term average, and that news helped to spur markets to action and gave the Euro a solid 3% lift over the course of the 3-day rally, pushing the pair at one point during Monday’s trading session to $1.3404, an 11-month peak.

But the 3-day winning streak for the Euro ended abruptly yesterday when the head of the Eurogroup, Jean-Claude Juncker, told the media that the Euro-Dollar was “dangerously high.” That would appear to contradict the concerted messages that the European Central Bank and other government officials have been trying to push through and puzzled at least one currency strategist who didn’t believe that the Euro’s moves had been extreme.

Indeed, some market players said that they used Juncker’s comments simply as an excuse to book profits from the recent Euro gains, and didn’t necessarily see a trend reversal in the making. But some analysts wonder if it might not get worse before it gets better; according to one analyst, this correction from what is now this year’s high could result in a pullback to the 1.3100 range, especially if speculation of the need for additional stimulus begins to build again.

Earlier this week, it was reported that Germany’s economy was harder hit in the last quarter to an extent greater than analysts had anticipated. The German Statistics Office reported that 4th quarter real GDP growth was only 0.7%, falling from 3.0% in the previous quarter and below expectations of 0.8% growth. On an annualized basis, Germany’s economy grew only about 2% as against the previous two years when 3% growth rates had been achieved. Germany, along with France, is seen as the driving force behind the Eurozone’s economic recovery and many economists worry that the prolonged recession is weighing heavily on the German economy which predominantly relies on export growth.

Meanwhile, the U.S. Dollar could find some support and extend the bearish trend of the pair as investors look to the greenback as a safe haven in the midst over what appears to be a battle brewing over the raising of the U.S. government’s debt ceiling. The squabble, though, could be grounds for yet another formal review and possible downgrade of the U.S. government’s credit rating according to Fitch Ratings which is among the top three ratings agencies in the world.

One economist sees this debt ceiling fight as the next big headwind to confront the U.S. economic recovery, but coming so soon in the wake of the fiscal cliff catastrophe it could be significantly more damaging. While experts say that the possibility that the U.S. government will default on its obligations is an extreme long shot, the political uncertainty and the ambiguity the debt ceiling debate has created could further delay the recovery as the private sector could decide to sit out and wait for an outcome before making any investment or hiring decisions that might otherwise be negatively impacted.