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Euro to Rally as ECB Fails to Implement Negative Rates
Euro_to_Rally_as_ECB_Fails_to_Implement_Negative_Rates_body_Picture_1.png, Euro to Rally as ECB Fails to Implement Negative Rates
Euro_to_Rally_as_ECB_Fails_to_Implement_Negative_Rates_body_Picture_1.png, Euro to Rally as ECB Fails to Implement Negative Rates

Fundamental Forecast for Euro: Bullish

The Euro was a top performer this week despite flashes of excessive volatility – the EURUSD saw prints close to $1.3100 and 1.2800 – as a slight uptick in data coupled with general anxiety over several of the single currency’s counterparts allowed gains to be found. To be clear: the Euro-zone economic picture is still horrid, with the region’s Unemployment Rate hitting 12.2% in April, an all-time high; while the youth Unemployment Rate (25 years old and under) continue to skyrocket, now at 62.5%. Certainly, there is a social crisis resulting from the economic crisis, an issue that will become more prevalent in the coming months as the US economy trends higher – on a relative basis, making Europe look that much worse.

Luckily for the Euro, issues outside of the region are garnering a great deal more attention at present time, affording it the opportunity to continue to post sizeable gains against the commodity currencies especially. Political tensions have been reduced to a low simmer in recent weeks, as the global economy seemingly waits around for the German elections in September because, let’s face it, there aren’t going to be any substantive shifts in the core’s stance on austerity until Angela Merkel can be sure that she retains her chancellorship.

On the austerity front, some good news emerged, offering support to the bullish Euro backdrop that has emerged since mid-May. Midweek, it was announced that the European Union had ended its excessive-deficit procedure against Italy. This is the first step in the right direction for the Euro-zone’s third largest economy, and perhaps it means that some fiscal stimulus may be on the horizon. Still, the European Commission warned that austerity should continue,in order to reduce the country's fiscal deficit from the 5.5% of GDP in 2009 to the 3.0%threshold required under EU regulations – which was supposed to be accomplished by last year. Given the current trajectory of the deficit, the EC’s Italian forecast calls for a further reduction to 2.9% in 2013 and 2.5% in 2014.

Ultimately, these two data points offer an interesting juxtaposition for policymakers: on one hand, the region’s labor crisis has never been worse; on the other, one of the biggest perpetrators of excessive debt accumulation has made significant progress. The policies are seeing their intended purposes, but at a harrowing cost.