EURUSD Outlook

The current macroeconomic instability in Europe and other regions around the globe is caused by the combination of economic slowdowns and higher public debts.  The problem is aggravated by the Fact that governments (especially the EU and eurozone authorities) seem to be unable to make decisive and efficient steps towards resolving the crisis. In this aspect, investors stay cautious as they cannot be sure about the safety of their investments.

What should investors expect amid instability and uncertainty? Will the common European currency collapse or survive? Let’s ponder on these questions together with .

Uncertainty – Eurozone’s Major Enemy

According to Eugene Olkhovsky, ’s leading expert in financial markets from Canada, the existing uncertainty leads to imbalances in financial markets. Some financial assets are depreciating. These are mostly the bonds issued by risky eurozone economies. This results in higher borrowing costs for those economies.

The existing macroeconomic risks can be divided into 4 groups:

·         Developed markets have exhausted their sources of economic stimulation through fiscal and money-and-credit policies.

·         There is no progress in resolving the eurozone debt crisis. Despite multiple agreements reached in mid 2012, the PIIGS economies can still see their financing cost boosting as markets keep questioning the efficiency of these agreements.

·         Most developed economies have reached a credit deadlock. All of them need to reduce their public debts (that increased during the latest financial crisis). The problem is aggravated by higher social spending (healthcare, pensions etc). Some of them face such a major problem for the first time.

·         Investors may reconsider their attitude towards the US and Japanese debts. The public dents of the 2 biggest developed economies have come close to their all-time highs. At the same time the debt burden keeps getting heavier amid record-high budget deficits. Social instability prevents those debts from being reduced.

Unemployment and Euro

The decline in the rate of employment seen over the last few months looks scary. The January rate of unemployment is some 12%. This is the highest level in almost 2 decades.

Spain is the frontrunner in terms of unemployment. The rate has gone beyond the limit – 26%. If to have a closer look at the situation, as of late February, some 5 million Spanish citizens are unemployed.  For reference sake, 12 months before, it was 300 000.

Austria is the most stable economy in terms of employment. The Germany rate of unemployment is relatively low as well – 5.3%. The rate of unemployment in France and Italy is twice as high, which is a wake-up call.

The overall employment background in Europe is rather gloomy. The most terrible thing is that more and more young people become unemployed every year.

Debt Burden and Euro Prospects

The biggest problem for eurozone economies is a huge debt burden. The average size of the European public, private and corporate debt is 86%, 66% and 101% of GDP correspondingly. For comparison sake, the US figures are 97%, 89% and 73% of GDP correspondingly.

The major reason why the eurozone is suffering more than the USA form the debt problem is the fact that the European currency union is a more heterogeneous formation than the USA. In the eurozone, each state has various credit characteristics despite having a common currency. The PIIGS (Portugal , Ireland, Italy, Greece & Spain ) are suffering the unions’ biggest debt burdens.

Almost all those countries that are now suffering from debt problems saw chronic budget deficits for years, which aggravated in 2008.

For now, even the world’s major trading and investments gurus like George Soros and Warren Buffett are now having difficulty forecasting Forex exchange rates.

At the same time, some experts believe that EURUSD will reach 1.43 in 6 months. Others give bearish forecast. Al in all, all those forecasts fluctuate within the 1.25-1.5 range.

The chart below, courtesy of , reflects the current state of affairs in the market of EURUSD.

This is what Maxim Gunn, an expert from , thinks on the matter:

At the same time, the 6E futures contract (EURUSD) keeps testing the 1.3082 - 1.3100 resistance area. A break and consolidation above the area will show us that the bulls have taken the initiative and are now dominating the market. In this case we may see a more considerable recovery against February’s downtrend. If this is the case, the price may encounter resistance around 1.3358.