© Greg Anderson
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I think the market has moved on past the German court and currently the bigger issue is: will the Fed launch the third round of quantitative easing today? If they do not, the Euro will move back, probably below 1.28-level. If they do, I think the market will attempt to take EUR/USD to a 1.30-figure.
Don't you think the Euro currently is being overvalued?
No, I would not say that due to a variety of measures. For example, on a very long-term basis our PPP type model, a long-term equilibrium model, puts fair value in the upper 1.30s. On a short-term basis things we look at relative to the Euro are sovereign spreads, measures of risk gap such as the level of equities. By those measures, the Euro is rallying with other financial assets and the Dollar is falling off against the major peers. This is a Dollar move more than a Euro move.
What is your outlook for the Euro versus the US Dollar for the end of September and for the end of the year? What will be key drivers which will determine Euro's performance?
There are several factors which will determine the Euro's performance in the nearest future. Greek exit is probably number one factor. Our economists think it is a pretty high likelihood that Greece does exit and the year-end would be a good point to do that. That is probably the first driver. Second would be relative monetary policies – does the Fed will do further QE, does the ECB cut interest rates by further 25 basis points, and finally the U.S. fiscal cliff issues and U.S. presidential elections in November. I would say that those are the biggest drivers. If the U.S were to fall off the fiscal cliff in a messy fashion, I think EUR/USD would fall down to 1.20. Moreover, I think that if Mitt Romney comes from behind and wins the elections, we may also see a big Dollar rally and thus EUR/USD would depreciate to around 1.20.