Europhoria Is Back, Eyes On 1.35?

Includes: FXE, UDN, UUP
by: FXstreet

The sentiment surrounding the bloc currency can't be better on Friday, as reflected by this week's price action in EUR/USD. It starting around 1.3300 on Monday, just followed by a small knee-jerk towards the vicinity of 1.3250 and after, the steep jump towards 1.3450, targeting 2012 highs above 1.3480.

… Germany is leading the way, and the rest?

First it was the ZEW Survey, then today saw a further improvement in the IFO. There is no doubt that Germany, the first economy of the euro area, is pulling the heavy wagons of the other members slowly out of the woods, a gargantuan challenge in every sense of the word. However, while the recent figures seem to contrast with the late Bundesbank vision, where the bank slashed the 2013 growth forecasts for Germany to a meager 0.4%, they seem to nod at Draghi's better prospects for the current year, as pointed out in the last central bank gathering.

So… is the crisis over then? Nothing could be further from the truth. It would be a serious misunderstanding to consider the eurozone problems to be over. Just because some German indicators were above expectations or President M. Draghi exposed his optimistic views does not put an end to the major issues that yet remain unsolved. A memory flash would remind us about Spain, for instance, where President M. Rajoy still proudly extols the virtues of the Mediterranean country for avoiding a call for financial aid, and thus diverting the attention off the 26% of unemployment that is hammering the economy. Another example is Greece, hidden at the moment, but do any market participants think that silence reflects a return to normality? It seems more like a ticking-bomb. Cyprus' financial rescue is a bit more complicated than estimated, although the size of its economy relegates it to a minor tier of problems.

In addition, while even euro-bulls can't deny it: the majority of the euro strength comes from USD weakness, accentuated by the late relative monetary policies: the Fed is keeping alive its stimulus program while the ECB doesn't. However, the incipient recovery of the U.S. economic activity points towards an auspicious optimism for 2013. Despite the recent vote on extending the debt ceiling talks to mid May, the U.S. fiscal front could well be another source of USD bids in the near and medium term.

In light of the current optimism hovering over the euro, analysts Brian Martin and Amber Rabinov at ANZ suggested, "… we retain our constructive outlook on the currency, view dips as buying opportunities and anticipate further appreciation in EUR/USD towards 1.4000-1.4500 this year."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.