Well, looks like today we may finally get the European interest rate cut, so I'd like to consider the effect it may have on the Euro. I may be entirely wrong but this is how it seems to me fwiw.
European economies have been struggling for nearly 5 years now, the Greek, Spanish, Irish, and Portugal have pretty much been brought to their knees, with Greece and now Cyprus requiring massive bail outs simply to survive. Unemployment across the Euro zone stands at 12.1% (30.04.2013 figure), with individual states such as Spain and Greece at 27.2% (source http://www.tradingeconomics.com), Germany on the mend at 5.4% and France at 10.6%.
This shows a fairly large range across the Euro zone and it seems to me that the single currency while for the rich countries is a splendid idea as it guarantees a fixed price market in an economy that is larger the the US. However for the poor countries this means debt and misery as their exports are too expensive outside the EU and countries like Spain, Portugal, and Greece have had big tourist industries which at the current Euro rate are expensive for tourist from outside the EU. These countries also export agricultural products and derivatives, again the high exchange rate can't be good for them. Even car sales are declining and of course European cars are expensive anywhere outside the EU. Inside the EU France sales are down 14.7% in the first quarter of 2013, down 13.9% in Spain and 17.4% in Italy. According the New York Times 2013 will be worse than 2012 (http://www.nytimes.com/2013/04/03/business/global/european-car-sales-point-to-continuing-slump.html?_r=0)
European (17 countries) GDP in 2013 estimated at -0.3 and was -0.6 in 2012. Germany estimates at 0.5% and Greece at -4.4%. US GDP expected at 1.9%.
So what is the intention of the ECB?
Until very recently we have seen the effect of the monthly ECB press conference as Euro strengthening, the tone has been pretty bullish resulting in the Euro/USD rate rising. This is strange as one would think that the best for Europe would be a weaker Euro to boost the export and the struggling tourist industry, however, as I see it, the ECB has almost always boosted the Euro exchange rate in these meeting. It was a struggle and a change at the ECB that brought the last rate cut, however, it did little to weaken the Euro.
As for today's anticipated cut, the Euro has rallied over 200 points since the rate cut was perceived by the trading public, this goes pretty much against what one would think, however we saw similar action last time. So it could be that this is buy the rumour and sell the news, or buy the rumour and buy the news.
Difficult to place a pre news trade with any conviction, and during the press conference later in the day (at 09:30 EDT) we'll see what tone the ECB takes this time, whether they intend to support the ailing economies by devaluing the Euro or whether to cause more hardship by talking the Euro up. It seems to me that the current ECB head is taking a softer approach than his predecessor, so I am going to take a small punt here and short the Euro ahead of the ECB press conference. This is not for the faint hearted as we often see big swings during the conference, so I am not recommending this trade, particularly as I may be 100% wrong and the ECB will do what it usually does, talk it up. So am allocating 2% for this trade and see what happens.
Have a good trading (and other) day.
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