After gapping up almost 50 pips to start the week, EUR/USD turned down from 1.2700 and ended Monday over 100 pips below its opening price. Strangely enough, this wasn’t the first time that this has happened!
As a matter of fact, just a week ago almost the exact same thing took place on EUR/USD. The market’s initial excitement over the Spanish bailout quickly died out last week, just as it did in response to this weekend’s Greek elections.
To me, this just shows a lack of confidence, and it clearly reveals the market’s awareness that there’s still a lot to accomplish to resolve euro zone’s structural flaws. Europe’s problems can’t and won’t be solved overnight, folks!
Bond yields tell the same story
Spanish 10-year bond yields rose to a new euro-era high of 7.29% and ended at 7.16% yesterday. Meanwhile, Italian 10-year bond yields rose by 19 basis points on the day to finish at 6.10%.
If these numbers don’t rustle your jimmies, remember that at bond yields of 7.00%, Greece, Ireland, and Portugal were forced to ask for bailouts!
It can be said that the same lack of confidence that was shown in European bond yields was reflected in euro action, as the euro weakened against all of its major counterparts.
Will EUR/USD see parity?
But is the lack of confidence over the common currency enough to drag EUR/USD all the way to parity? At least one analyst thinks so. Steven Barrow, head of G10 research at Standard Bank, believes that the pair could see such a drop if the region’s debt concerns “really get out of hand.”
And why wouldn’t it? For one, Spain has already opened the gates on receiving condition-free bailouts. Ireland and Greece are already in the process of renegotiating their respective packages, but market players are now wondering if this is all leading to a series of bailouts that could soon include full-scale packages for Spain and even Italy.
If the domino effect on bailouts materializes, then the euro zone’s coffers could soon run out, forcing the region to actually tackle its fiscal problems. For many euro states, this means higher taxes and even harsher budget cuts that could further cripple the European economy.
So what are the chances that EUR/USD will hit parity?
Technically, it’s not impossible. If we take a look at EUR/USD’s weekly chart, we’ll see that the pair has been on a downtrend for the past 12 months. At this rate, a fresh low would only be a continuation of the long-term trend.
But for the pair to hit parity, a level that hasn’t been touched since 2002, conditions in the euro zone would probably have to deteriorate rapidly and drastically.
Besides, you also have central banks from all over the world determined to defend their currencies. The BOJ and SNB are on intervention watch, while the Fed is also expected to launch more quantitative easing in the near future.
At least, for now, the possibility of EUR/USD at parity seems unlikely. But for how long will it remain that way?