The Euro Zone has been facing a sovereign debt crisis for the past one year, which has played a significant role in the behavior of the 17-member currency union in the foreign exchange market. During the January 17 to January 21, 2011 trading week, various factors determined the trading of the European currency. As the trading week commenced, traders relied on a number of positive news concerning the euro that compelled them to buy the currency. The much-awaited meeting of the euro-zone finance ministers’ resolved to look for ways of assisting to alleviate the debts of the nations, which have the most debt (Schoenberger, para. 1). The German ZEW Economic Sentiment report also increased the bullish pressure of the currency as it exceeded the expectations of the investors.
Midweek brought further buying pressure on the common currency as the soaring price rises in Europe resulted in assumptions that the ECB (European Central Bank) may want to increase the interest rates in the nearest future in contrast to the relatively low interest rates of the United States Dollar. In addition, investors were reacting to a report that China was reviewing its policy to have the US Dollar as a reserve; consequently, investors may have rushed to buy the Euro as a reserve. At the close of the week, the Euro had jumped to a two-month high at the 1.36 region, up from 1.32 region at the beginning of the trading week.
During the January 24 to January 28, 2011 trading week, the bullish pressure of the Euro, which was enhanced by the investors’ confidence that the Euro Zone would tackle its debt crisis and Germany’s pledge to support the European currency, continued earlier in the trading week. When the United Kingdom Gross Domestic Product was announced, there was risk aversion as the report revealed that that the economy of the country is shrinking. Consequently, traders were concerned about the effect it might have on the economic problems of the Euro Zone. By midweek, investors came again to buy the Euro.
This was fuelled by the anti-inflation comments from the ECB regarding probable increase in interest rates and this made the common currency to stay well above the key 1.36 mark. However, the main shock of the week was witnessed the last day when Egypt’s political problem resulted in risk aversion across most markets, which resulted in a flight to safety assets such as the United States Dollar. The European currency fell to a low of about 1.3586 from nearly 1.3748 it had reached during the week. This broke the rally the currency had been having, which was also questioned by financial analysts because of the Euro Zone smoldering debt problem.
At the start of the January 31 to February 4, 2011 trading week, the European currency gained against the US dollar as speculation increased that the ECB could increase the interest rates so as to restrain the rising inflation. Investors were not worried so much about the mass protests in Egypt that were meant to unseat longtime President Hosni Mubarak. And for the first time in two and half months, it traded above the 1.38 area for sometime. This happened because investors chose more risky assets that pressurized the safe havens and strong economic data (especially from Germany) indicated a growth in the Euro Zone’s economy.
However, at the midst of the week, the common currency dropped to below 1.38 area due to increasing violence between pro- and anti-government protestors in Egypt. Further, this brought a fresh reminder concerning the debt crisis in Europe. As the end of the trading week approached, positive sentiments on the Euro started to diminish sharply and the European currency fell strongly. In addition to the Egyptian crisis, the much-anticipated increase in interest rate by the ECB failed to materialize. Worse still, positive economic data from the United States on the last trading day resulted in a cascading knee jerk reaction that made the European currency to trade below the 1.36 area.
As traders went into the February 7 to February 11, 2011 trading week, there was a lot of uncertainty regarding the outcome of the crisis in Egypt that could again bring huge impacts in the currency markets. At the end of the first trading day of the week, the 17-nation currency was still trading below the 1.36 area. However, it soon gained against the dollar the following day and trading above the 1.36 area.
This happened despite the bad economic report from Germany, interest rate increase by China, and indications of strong economic growth from U.S. By midweek, the Euro had climbed against the U.S. dollar to close above the 1.37 area after the currency surmounted worries about ECB’s inflation-fighting acumen and lack of details on how to address the region’s sovereign debt problems.
As the trading week was nearing to an end, some risk appetite returned to the market as traders failed to take into consideration negative economic reports from Germany. However, at the end of the trading week, the European currency slipped against the U.S. Dollar and traded below the 1.36 area. The ousting of the Egyptian president raised questions concerning potential ripple effects to the rest of the Arab world and made investors to prefer the Dollar to the Euro. In addition, there was renewed attention concerning the region’s economic problems.
As traders approached the February 14 to February 18, trading week, they were aware of the challenges that are facing the Euro Zone: the search for the new ECB head and the sovereign debt woes of the region. In the early week, the Euro was volatile and traded within a tight range probably because of less than expected economic news from both sides of the Atlantic. Therefore, traders were taking time to consider the risks on both sides of the situation. As the week progressed, the European currency gained a considerable number of pips and its bullish pressure failed to make a significant move above the 1.36 area.
The strength of the U.S. Dollar reduced even as positive economic news from the U.S. was overtaken by world events that made investors to rush to purchase the Swiss Franc, which is usually a favored safe habor during times of global crisis. It was reported that the Iranian army was preparing for a conflict with the Israeli army and this is what led to the weakening of the dollar despite the improving picture of the U.S. economy. On the last trading day of the week, positive reports regarding the German Producer Price Index renewed the strength of the European currency and it took over 1.36 and tested the 1.3680 line.
Works Cited
Schoenberger, Chana R. “Investors Awaiting Europe’s Next Move.” WSJ. The Wall Street Journal, 2011. Web.