Ulrich Leuchtmann, Head of FX Strategy at Commerzbank, on EUR/USD

Note: This section contains information in English only.
Source: Dukascopy Bank SA
© Ulrich Leuchtmann

Currently, everyone is concerned about Italy's election results. Do you also think that current political deadlock in Italy may deepen debt crisis in the Eurozone? 

It has the potential to escalate the debt crisis, simply because Italy's election shows that at least the majority of voters are very sceptical about all the measures taken by the Monti government, and the voters also favour Euro sceptical parties.  Therefore, it stands to reason that it does in fact have the potential to worsen the crisis as it questions the medium to long term austerity and structural reform efforts.  Having said that, at the moment the crisis is not escalating principally because the market still believes in the ECB`s promise to conduct unlimited purchases of government bonds should the crisis remerge again. As long as the market relies on this promise of the ECB, it is only a short blip and the market will relatively quickly fall to the pre-crisis or non-crisis mode again.

The Euro approached the lowest level in almost three months. Where do you see the Euro heading? 
The ECB and especially Mario Draghi will do everything to remind the market of the fact that they are keeping the OMT programme in the background, which would be activated if needed. This can cool down the market's concern that has been dominating since the Italian elections. Therefore, in the short run I see an upside potential for EUR/USD. 
In the medium run, however, I think that this upside potential is quite limited. If a too strong Euro tempers the ECB`s inflation and growth outlook, and the Fed considers to rescale its own asset purchases programme in the foreseeable future, this would be net-net or Dollar positive. Therefore, in the medium run, I expect this upside potential for the Euro to be not only very limited, but also quite short-lived.

What is your forecast for EUR/USD for the short and long term?
I think in the short run, once Mario Draghi calms the market and the concern about Italy is gone, we might see some upside potential in EUR/USD toward 1.35. As I said, in the medium run, let us say until the year end, all of this might be eaten up by the general Dollar strength. Therefore, EUR/USD might end the year, perhaps, even below the current levels.  I would say 1.28 is a good target for the year end.

What key events we should focus on in the short run?
If the crisis escalated and if the market did not believe in the ECB`s willingness to cap yield levels by the securities purchases programme, then we would see the crisis remerging and the market would not be prepared for such a scenario. Thus, in this case I anticipate EUR/USD to fall, perhaps, toward 1.20 area. 

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