Guest blogger post today, by staff at forextraders.com. Site has many insightful Forex related articles and is worth checking out.
All of the news about the Euro seems to have been the same thing for several months now—Greece is looking for help and the EU doesn’t want to give it. This has created some of the greatest volatility for cable (EUR/USD) in a very long time. What does that mean for the future, and how can you adjust your forex trading to profit from the instability this has caused?
First, a little background. Greece entered the EU—apparently fraudulently, by hiding how deep its debts really were. All of that has started to come around now with side budget deficits and deep debts that keep on mounting. When Greek politicians propose austerity measures, the population reacts, but meanwhile, the debt keeps on mounting.
Meanwhile, the other EU nations (particularly Germany) have little interest in bailing Greece out—even though the news has been hammering the value of the EU. For a short time, it even looked like the US might get involved with a small bail out. At last, the Europeans have come to some type of agreement to help Greece, though backing from the IMF was also crucial.
So what does this mean for the EUR/USD pair? The most fundamental question is whether the Greek crisis is only the beginning of troubles for the EU. Ireland, Portugal, Spain, and maybe Italy are also facing rising public debts. If adjustments aren’t made soon, the Greek crisis could only be the beginning of problems for the EU.
If this comes about, the Euro is in for some serious volatility over the coming months—and mostly headed downward. Because abandoning the currency would be impossible, this will probably force the EU nations closer together, with shared fiscal policies and some amount of shared political control. In short, it remains to be seen whether placing multiple countries under one currency was a very good idea.
Meanwhile, the US is facing its own budget shortfalls and mounting deficit. To this point, this has not been much of an issue, since the market still regards US bonds as a fail-safe investment. But how long can this go on? What level does the public debt have to reach before ongoing borrowing costs mushroom?
It appears that problems for the EU are already on the horizon, but by that standard, the US faces the same problems just over the horizon. Since it seems clear that issues will come first for the Euro, expect to see a rise in EUR/USD for the next few years. If the Greek crisis is duplicated elsewhere, this adjustment could be fast and large.
In the short term (which is what most forex traders care about), expect to see a downward trend in the value of the Euro as skittish investors move to the dollar. If a workable solution is established to carry Greece through the next few years, expect to see a quick pop back up in the Euro. The uncertainty has certainly been a strong downward pressure.
In the meantime, learn as much as you can from the results of the Greek crisis. This is certainly not the last time the market will see a major, developed economy punished for bad debt. If you can learn well, you’ll have plenty of future chances to profit from the same process.
Well, maybe just dropping Euro is not really possible, but individual countries can be either be ejected or leave on voluntary basis. Unlikely it should happen right away, but if the current bailout doesn’t work, we could see some serious talk like that.
Bailouts are not bad idea but it depends on the timing. The ECB looks to be late and the next of the PIIGS dominos to fall is Portugal. The ECB’s debt backstop may remove the risk of a sovereign debt default only if budget reforms will follow, but I am sceptical that Greece, Portugal or Spain will implement them.
Yeah, Greece has terrible track record when it comes to any “austerity” meassures. They failed twice in the 80′s and once in 90′s. BTW, what is the sentiment in Poland now about joining Euro?
Mike, honestly the sentiment is non-existing, but the governement talks about joining the EUR in 2015…maybe. I watch Estonia to see what experimenting with a hot patatoe may end up with.
So it is long time away. No rush then…
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[...] focus point and for right now it is the Euro. After a few months of being swept under the carpet, the sovereign debt issue is once again in the for front. This time it is Ireland supposedly in risk of default. Its failing [...]
[...] focus point and for right now it is the Euro. After a few months of being swept under the carpet, the sovereign debt issue is once again in the for front. This time it is Ireland supposedly in risk of default. Its failing [...]
[...] right now it is the Euro. After a few months of being swept under the carpet, the sovereign debt issue is once again in the for front. This time it is Ireland supposedly in risk [...]
[...] the aid is needed, and applied, Ireland will be forced to take austerity meassures, similar to what was demanded of Greece. And these steps would be painful. After all the Irish budget is projected to 32% deficit, more [...]
[...] the aid is needed, and applied, Ireland will be forced to take austerity measures, similar to what was demanded of Greece. And these steps would be painful. After all the Irish budget is projected to 32% deficit, more [...]
[...] the aid is needed, and applied, Ireland will be forced to take austerity measures, similar to what was demanded of Greece. And these steps would be painful. After all the Irish budget is projected to 32% [...]