Remember the time when a Euro was worth almost a quid? That was only back in early 2009, but it seems like a lifetime away now. Three subsequent years of turbulence have dragged the single currency to back below the 80p-mark for the first time since the dark days of late 2008, when the pound was just about to plunge against the Euro. Now the tables have been turned and it’s the Euro that is at risk of entering sharp decline.
The spreading crisis in Europe is, of course, the main cause of the single currency’s weakness. The threat of Greece defaulting on its borrowings and leaving the currency union is very real indeed. The solvency of Spain’s banking system is also a major concern, despite the government’s intervention to prop it up. If either of these problems worsen, other Eurozone nations could be dragged down too.
If the Euro is going to survive in anything like its current form, I firmly believe the European Central Bank (ECB) is going to have to take radical action. It has already take steps in this direction, by pumping many hundreds of billions of Euros into the continent’s damaged financial system. This merely bought some time to solve Europe’s deeper problems, however, and that time has now run out without those problems being resolved.
Aside from further support to Europe’s banks – particularly in Spain – I think the ECB needs to step up to the plate and pursue more aggressive monetary policies. By this, I mean something like printing money and using it to buy up government bonds and thereby lower borrowing costs. Germany’s opposition to such policies is, of course, famous, a legacy of the nation’s interwar hyperinflation. However, pragmatism will eventually predominate over principle, in my view.
National defaults and a breakup of the Euro are big and terrifying steps into the unknown. Money printing to buy bonds, by contrast, is an approach that the Eurozone’s neighbours in the UK and Switzerland have already tried and tested, not without some success. After all, these measures have helped to keep British and Swiss borrowing costs low, and have boosted other financial assets, like shares.
Admittedly, Britain’s situation is hardly a bed of roses. The economy is in recession, albeit a mild one, and I expect the Bank of England to print yet more money later this year, particularly if the Eurozone situation deteriorates and the pound becomes uncomfortably strong against the Euro. However, the single currency’s problems are worse, and I predict that it will weaken against sterling as a result.
Around the end of last year, the Euro fell through a key level on its price-chart, namely the 200-week exponential moving average. It remains some way below this line today (83.73p), and the exchange rate’s trend is most plainly downwards. The point-and-figure charts highlight targets at 74.19p and 67.84p. I certainly think the former is likely to be reached, and that there’s a decent chance of the latter being seen too.
As of Tuesday 29 May, Euro/Sterling is oversold on its weekly chart, as measured by the relative strength index. This raises the chance of a short-term comeback, perhaps taking the rate to and perhaps even through its 21-week exponential moving average (82.32p). Thereafter, however, I expect further weakness towards those previously-mentioned point-and-figure objectives. Drops back below the 55-day EMA (81.6p) provide an obvious entry for shorting the Euro.
**Dominic will be presenting at the London Investor Seminar on 18 June - book your place today.**
