Managed Forex Accounts EUR USD Outlook 2008 3 3
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Managed Forex Accounts: EUR/USD Outlook 2008
Overview
Discover the EUR/USD trends for 2008! Explore why the USD weakened in 2007 and the potential impacts of the US presidential elections on financial markets.
Eurozone Outlook
The performance of the EUR/USD is significantly influenced by the economic conditions in the Eurozone. In 2007, the EUR/USD hit an all-time high of 1.4968. This rise was fueled by the US Federal Reserve's 100bp rate cut, contrasted by the ECB’s 50bp rate hike. Despite fears of a strong euro hurting the Eurozone economy, growth was robust. Germany, in particular, saw increased exports that boosted its trade surplus, while emerging markets drove further expansion. By learning from past experiences, Eurozone corporations effectively managed foreign exchange risks by boosting local production to mitigate the effects of a weak US dollar.
As we move into 2008, growth is showing signs of slowing. German business confidence has dropped to a two-year low amid concerns about higher interest rates, tightening credit, and rising inflation. Both the European Commission and the ECB anticipate lower growth than previously estimated. Recent liquidity injections into the financial system suggest the Eurozone is not immune to the US business cycle's effects. The latest consumer spending and other economic indicators of 2007 have shown declines. If the ECB doesn’t consider lowering rates soon, a significant economic slowdown could occur.
ECB Rate Hike Prospects
As 2007 concluded, the ECB President emphasized the bank's commitment to controlling inflation and not succumbing to pressure from US and UK rate cuts. With a focus on price stability, the breach of the ECB's 2 percent inflation target in late 2007 caused concern. Despite past threats of further rate hikes, the ECB's actions have leaned towards a more flexible monetary policy. Following record-high LIBOR rates, the ECB injected $500 billion into the banking system, successfully reducing these rates, though the duration of this effect remains uncertain. While a rate hike is conceivable, it is unlikely. The trend suggests rate cuts may occur first, contingent on inflation pressures like $100 oil prices. If inflation steadies or decreases, the ECB is more inclined towards rate reductions.
Conclusion
Interest rates will continue to be the primary influence on currency markets. The US economy and dollar have recovery potential in the second half of the year, which depends on further rate cuts by both the US Federal Reserve and ECB. Shifting ECB statements from hawkish to neutral could trigger a USD recovery. Economic re-coupling may become more evident by the mid-year, while January typically favors the dollar.
Market conditions will change when negative news gives way to optimism. Alan Greenspan, former US Federal Reserve Chairman, suggested that banks should acknowledge losses swiftly to allow market recovery.
Short-Term Technical Outlook
In the final quarter, an expected rally to 1.4580 followed by a reversal was anticipated. Technical analysis now indicates 1.4309 as a key point in wave iv of a larger 5-wave rally that started at 1.3261. The wave v of 3 might surpass 1.4967 within four to six weeks, with a potential target of 1.5364, aligning with a 61.8 percent follow-through extension. Current indicators support a bullish short-term outlook due to bearish sentiments on the Euro and bullish ones on the USD. The rally could possibly extend towards 1.6000, following the usual currency pattern of extending on the 5th wave. Monitoring the formation of these patterns is crucial to anticipate market turns effectively.
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