Trading the EUR/USD currency pair is also known as trading the "euro".
Those who actively trade forex know that both the Euro and the U.S. Dollar have come under pressure lately for various reasons. In the case of the Euro, its weakness arises from sovereign debt concerns centered on Greece which have benefited the Dollar.
Nevertheless, the Greenback has suffered because of record budget deficits, two wars, massive unemployment and a sub-prime mortgage real estate disaster. The European Union also faces a considerable amount of economic pressure, having achieved almost no growth during 2009 and also suffering from very high unemployment levels beyond 10%. The current tug-of-war between the Euro and the Greenback seems to fluctuate depending on whether forex traders are more concerned with some of the Eurozone member nations having sovereign debt problems, or with the precarious economic recovery in the United States. As of this writing, the Greenback seems to be winning, especially after a recent surprise move by the Federal Reserve to tighten the Discount rate by 25 bps to 0.75%.
Also, the United States economic numbers have been slowly improving, with consumer spending showing improvement in January, rising by 0.5% from the previous month with November and December’s figures also adjusted upwards. In addition, U.S. GDP is now expected to surpass 3.5% this year, and Core Retail Sales rose by almost 6% annually for the last six months. The U.S. stock market has also maintained a surprisingly resilient level above 10,000, despite many corporations having difficulty turning a profit.
Nevertheless, although the United States is mired in debt with a budget deficit over a trillion dollars this year, and more than that foreseen for next year, the fact that the trade deficit rose to $40.2 billion in December, up from $36.4 billion in November, confirms that the economic expansion, although gradual, is now under way. The Federal Reserve is also expected to begin tightening interest rates further if economic numbers keep improving.
The European Union, on the other hand, has some extremely sensitive issues surrounding the debt of its member nations Greece, Ireland, Portugal and Spain, who all have now had their debt downgraded by S&P and other credit rating agencies. Despite numerous efforts from other Eurozone countries like France and Germany, who have both pledged to bail out Greece, a clear solution to the sovereign debt problems of these member states has still not been worked out.
The EUR/USD currency pair has also seen an impressive amount of volatility since the beginning of the year, with the Euro now down more than 2% against the Greenback on the year and still making new yearly lows within its recent decline. The rate appears to be stabilizing, however, as the Dollar begins to show signs of consolidation.
Furthermore, with commodities such as gold and oil trending higher, both currencies stand to fall under some pressure as net importers. Still, the U.S. Dollar seems to be benefiting from better-than-expected economic numbers, and despite China liquidating over $34.2 billion of their U.S. Government-backed securities in December, the Dollar seems to be weathering that particular storm rather well.
Which currency will end the year stronger is still anybody’s guess. Nevertheless, if the European Union’s sovereign debt problems fail to get resolved, the U.S. Dollar may appreciate more, especially given the Federal Reserve’s recent surprise move.