Europe’s currency market seems to be in a tailspin with some analysts predicting that EUR/USD may break below 1.20 at one point during the current bull market in Europe. This is a very bearish sentiment and one which has been very prevalent for quite some time but the recent announcements of fiscal talks making progress may make things more bearish.
When it comes to European governments, Germany’s Angela Merkel may have taken a major hit. The German Finance Minister Wolfgang Schaeuble has been very vocal about the necessity to renegotiate the German debt and economic policies if Germany would like to stay in the euro. The latest comments have caused the German currency to plummet to its lowest level against the US dollar since August.
In the same way, France’s Francois Hollande has also announced that he will try to negotiate with his European counterparts to help the French economy, and this may cause the EUR/USD to break below 1.20 in the near future. It is also possible that even Greece may opt for a bailout program as a result of a lack of support from other European leaders. However, if this does happen, the Euro will not be destroyed as expected as it has already suffered quite a bit of damage.
The European government and its policy makers will also need to work out how to increase fiscal transfers to the European Union budget. In order to save the Euro, governments will have to compromise between their fiscal policies and the EU’s fiscal policy.
Another factor that may push the EUR/USD below 1.20 is the news that European bond yields are expected to remain lower than previously expected. If you have been holding German and French bonds, you will be happy to hear that you can still sell them until they break the current EUR/USD resistance level. However, you may have to pay a higher price than if you had sold them last summer or fall when bond yields were at their highest levels ever. With the current developments of the European government, bond yields should go up and down depending on the strength of the European government.
The European government and its bond holders will have to decide if it is worth the risk of going through all the political problems, especially if it means that they will lose money on bonds that were bought at high prices in the past. There is no guarantee that bond yields will continue to stay low, especially if the EU has to negotiate with its partners to get a better deal with the International Monetary Fund. on debt relief.
The European government will also have to consider what impact it has to face in the next few months if negotiations with the International Monetary Fund are unsuccessful. Should bond yields come down further and bond yields start climbing, the European government will be forced to make drastic measures to keep the Euro afloat and regain confidence.