We Were Wrong About Euro

Helen Rush,

Senior Analyst at Capital Markets

Yesterday, we underestimated the strength of EUR/USD, and overestimated the hawkishness of the FED chairwoman. On the back of thin market and lack of economic data investors overreacted to the positive comments of the ECB’s Mario Draghi. There is no use to talk about it now. We need to understand what to do next.

First, Draghi has really surprised the markets. Practically, he announced the start of the new era for the euro zone economy. And the way the investors reacted to it shows that they do believe in the EMU growth recovery. And this gives a good potential for the euro appreciation.

Second, the FED’s Yellen didn’t say anything new. She just reaffirmed the well-known thesis on the gradual rate increase, but the market has already priced-in this notion. And there are some doubts on the strength of the American economy. And this gives a good potential for the USD depreciation.

Third, the market has long been unconfident in the euro zone future due to migration problems, election uncertainty etc. Now many risk factors have left the stage, and it triggered the broad based short-covering on the single currency. And this gives a good potential for the euro appreciation in the short-term.

It means that EUR/USD after it broke 1.13 has good potential to reach 1.15 next week, and the nearest target for today is 1.1420.