EURUSD ahead of 2009

As the credit crisis was hitting hard on global economy, EURUSD was turning  against its major long lasted bullish trend, and following sharp falls in stock markets and oil price, EURUSD plunged dramatically from August until October 2008 to the bottom price of 1.2328.

However, before we had a chance to get used to EURUSD trading under 1.3 , along came December and with it some astounding buying power that brought us back to the 1.4 area in almost no time.

Although possible, it is still unlikely to see EURUSD retaining itself from high volatility in the first quarter of this year. Drastic shifts in price can take place every time there is a new development concerning the financial crisis. However, the more we get into the year, the more understandable the scale of the crisis becomes. this fact alone should help reducing volatility on this pair in the second half of 2009.

Volatility or not, the main question traders ask themselves is whether EURUSD is going to continue what it started on October and renew its downtrend during 2009, or whether is it going to maintain higher levels ( above 1.3) throughout  the year?.

So far ECB has been one of the least aggressive central banks in 2008, having cut interest rates by only 175bp to 2.5 percent. In comparison to the 400bp rate cut from the Federal Reserve and the 350bp rate cut from the Bank of England.

It is obvious that in a scenario where the ECB had undervalued the severity of the crisis, which by then would hit hard on Europe’s economy – forcing the ECB to slash interest rates to zero like lows, while at the same time the U.S with its promising new president is starting to show first signs of recovery, or at least a ” less worse than expected” attitude- it is obvious that in this scenario the EURUSD should be  well under 1.2

However, if the opposite is true, and in case the real European economy would be able to absorb most of the economical shucks and blows expected during 2009, while the ECB continues with its planned policy- gradually cutting interest rates, it is likely EURUSD will regain its strength coming the second half of 2009.

Whatever the ending of 2009 would be, EURUSD together with most of the major currency pairs, is still in a  fragile stage where fundamental reasons are capable of creating drastic changes in relatively very short time. Until we are clearly back to normal trading volume, it is better to concentrate our analyzing efforts on the immediate sentiment of the market, instead of long term market evaluations.

Z.Georgi

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