Euro: investors just waiting for a reason to sell

Concrete action, not resolutions and promises, is what's needed to reassure eurozone investors, writes John Freeme of HiFX.

Back to you, Merkozy

The European Central Bank (ECB) left its base lending rate unchanged at 1% on Thursday as predicted. This shifts the focus back onto the Merkozys of the world, who face renewed pressure to do something to end the European sovereign debt crisis.

The ECB, led by Mario Draghi, decided against cutting rates in favour of holding back to review the effectiveness of the existing plans, which were implemented in late 2011. The ECB cut rates in November and December, and increased the funding available to banks to try to subdue concerns that one of the European banks could be the next Lehman Brothers.

The move left the single currency largely unchanged against both the US dollar and British pound. Arguably, traders were waiting for another excuse to sell the euro and continue to drive the European currency towards key levels, which they did not get.

Draghi has acknowledged that the European Union is in a very tough situation, with substantial downside risks to the European economy, and has said that the situation may get a lot worse before it starts getting better.

The concern remains that the vast majority of European economies are still paying far too much to service their debt. This is coupled with the fact that they are being strong-armed into implementing significant austerity programmes.

One of the main factors behind the euro's recent decline to its lowest rate in 16 months against the US dollar and British pound is that investors are getting increasingly frustrated with the lack of unified and swift action. This sense of urgency has helped the euro off its lower levels and back below the psychological 1.20 level against the pound.

Euro to stay low

Undoubtedly, the euro is still out of favour, and I cannot see that changing in the short term. There are countless promised resolutions and agreements, but very rarely do we get anything concrete implemented. The end of January will be the next important event as leaders are put back in the lime light to sign off the agreements formed in late 2011.

Therefore, our outlook is for the euro to ‘bring up the rear’ in a race of the major currencies over the short to medium term, with sterling/euro around 1.25 and euro/dollar around the 1.28 region.