EUR/USD strength could falter near term – UBS

The bloc currency was trading at 1.2626 against the US dollar at the end of the Asian session on January 16. It closed at 1.3218 on Friday 27. Impressive, surprising and longer-than-expected rally. Or at least longer for those who were attaching short-covering reasons to justify the upside. The increasing hopes for a deal between Athens and the private holders of Greek debt plus the ECB’s LTRO pumping liquidity into the markets were enough to propel the demand for the single currency in detriment of the safe havens in the last sessions.

According to M.Mohi-uddin, Managing Director of Foreign Exchange Strategy at UBS, the EU Summit on Monday will prove to be vital in nailing some of the issues still pending from the last meeting in December 2011, mainly regarding the fiscal compact. Progress in this matter could boost the ECB purchases of sovereign bonds in the secondary markets, thus easing the sentiment in the euro zone.

But the expert also signaled some headwinds: even if Greece seals an agreement, its fundamentals will yet be bleak. Same situation could apply to some euro zone members with excessive debt. More relaxed monetary policies would follow further austerity measures, reinforcing UBS opinion that the ECB will cut the repo rate by 50bps in the near future. In the same direction, the latest downgrades of euro zone members are likely to keep fund managers away from increasing their positions in the bloc assets. In the analyst’s words: “This suggests that the rally in the euro above 1.30 against the dollar will be reversed again in the next few weeks.”


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