Fundamental Forecast for Euro: Bearish

The euro has found some level of stability against the US dollar; but against the less fundamentally controversial franc and sterling, the currency’s true colors show through. Both EURCHF and EURGBP ended this past week near multi-month lows. And, considering the fundamentals that face the currency going forward, there is a high probability that the euro is set for another drop. That said, the real question is whether the region’s troubles are significant enough to spread to the market’s most liquid currency pair: EURUSD. Considering the primary concern amongst investors and traders – the deterioration of the region’s financial markets – is only worsening with time; the most likely outcome for the euro is selling across the board (year-end liquidity allowing).

Calling for a euro decline is a tall order. We have essentially seen the same fundamental fears circulate the currency for weeks now; and, in some respects they have actually intensified. And despite this, the euro was capable of putting in for meaningful correction to begin the month and subsequent consolidation well off its lows. What is needed is a catalyst to spark traders’ imaginations and fear. We have just such an event come Wednesday. Despite an appeal for financial aid from Prime Minister Brian Cowen and the approval of an 85 billion assistance package; Ireland still faces another vote: Parliament’s vote over whether to accept the terms and capital. It will be tempting for fiscal conservatives and nationalists to shoot the bailout down as the nation would not likely need it if market conditions stabilized. However, betting on a market recovery is as speculative as trading the FX market.

There are two obvious scenarios for Wednesday’s vote. The least likely outcome and therefore most dramatic would be to vote the rescue down. Such an event alone would immediately return the word ‘Crisis’ to the headlines of financial papers the world over. Setting off panic itself, this action would severely limit the options for the country to either try to weather the storm as its banks are shut out of the capital markets or attempt to appeal for help from somewhere else. And, considering how deeply rooted Europe’s troubles are; the likelihood that this particular event could push the region over the edge is worryingly high.

What happens, though, should the vote go off as expected? Will the market breathe a collective sigh of relief? Considering the limited reaction to the initial acceptance of the Irish bailout, the relative-formality of accepting it won’t be that highly regarded. What’s more, the euro’s problems run far deeper than just Ireland. Just this past week, it was brought to light that German Chancellor Angela Merkel threatened to quit the euro. These threats may have been just posturing; but her efforts to block any further expansion of the EFSF rescue fund or issues Euro Zone bonds is anything but. Looking down the line, many believe that should Spain fall on hard times, the existing 750 billion euros on tap would not be enough to put out this nation’s fires along with the others that are already struggling. Perhaps then we should keep an eye on both the December 16-17 EU leaders summit as well as Spain’s scheduled bond auction as well.

DailyFX provides forex news on the economic reports and political events that influence the forex market.