After last week’s sharp losses, EUR/USD has leveled off as we begin a new trading week. On Thursday, the markets reacted negatively to comments by ECB head Mario Draghi, who warned that the high value of the euro was a risk to growth in the Eurozone. US Trade Balance numbers looked good, as the deficit narrowed significantly. On Monday, French Industrial Production declined, but managed to beat the estimate. Today’s highlight is the Eurogroup meeting in Brussels. The euro is currently testing the 1.34 line.
In January, the euro rallied following positive remarks by ECB head Mario Draghi about the Eurozone economy. Speaking at the ECB’s press conference last week, Draghi once again lit a fire under the currency, only this time in the opposite direction. Draghi warned that the high-flying euro was affecting prices and economic growth in the Eurozone. He stated that the exchange rate was not a policy target, but the ECB would “closely monitor money market developments”. The markets wasted little time in reacting to these comments, and the euro plunged, losing over a cent. Almost lost in the excitement was the fact that the ECB’s key interest rate remained unchanged at 0.75%.
Meanwhile, in a recent speech before the European Parliament, French President Hollande called on the Eurozone to set a “medium term” target for the exchange rate of the euro. Hollande’s remarks were a response to the high value of the currency, which is hurting French exports and the manufacturing industry. However, German officials were quick to state their opposition to such a move. German Economy Minister Phillipp Roesler summed up the view in Berlin, declaring that “the objective must be to improve competitiveness and not to weaken the currency”. While the German economy is showing recovery signs, the French economy continues to stumble, and Hollande is grabbing for any crutches he can lay his hands on, including a more competitive euro. The question of currency intervention will not disappear anytime soon, with heavyweights France and Germany at loggerheads over the issue.
At a meeting of EU leaders last week, EU leaders hammered out a deal to cut the EU budget. This marks the first time that the bloc’s seven-year budget is being reduced, from the current 994 billion euros to 960 billion. The cuts are modest in scale, but nonetheless an important step in reigning in spending. The deal is a hard-fought compromise, as it reduces the budget while providing more funds for agricultural aid. Although all EU leaders have signed off on the agreement, it must be approved by the European parliament, which is by no means certain. European Parliament head Martin Schulz has already stated that the budget will not pass in its current format.
