ZuluTrade Blog

EURUSD Outlook for the First Half of 2012

Mid & Long Term | Wednesday, December 28, 2011 7:44 AM GMT

2012 will be another exciting and probably erratic year.

The time of reckoning is coming for the euro zone. It must either clear the political and fiscal bar, or miss it and enter a dangerous period of recession. We are hopeful, however, and see a positive – though grinding – period of euro zone resolution. Our base scenario is therefore one of unspectacular global Growth, but this outcome also depends heavily on European weakness being matched by resilient growth in emerging countries and modest growth in the United States. It’s widely expected that the euro zone will start 2012 in recession, but that the rest of the world will manage to escape. The euro will survive ultimately, but many more measures are needed before that’s set in stone.

Several analysts see a considerable chance (average about 30%), that one or more countries leave the euro zone. But we will not believe on that- or better - we will give a much smaller possibility . And certainly not in the first 6 months of the year.

With the euro zone debt crisis worsening one might have expected a sharp fall in EUR/USD. But instead of collapsing and losing its status as a world currency, the EUR has shown resilience. One widely held view for this is that the EUR is protected by being a “German proxy”. Other observers reiterate that the alternative – the USD – is also unattractive. Furthermore, the EUR is the currency of the world’s largest economic block and therefore remains the currency of an economic giant. As the crisis progressively hits the core European AAA countries, crisis escalation may lead to flight from the EUR. If German Bunds lose their shine as an ultimate safe haven or the ECB launches a forced quantitative program (or both), we could see the EUR declining versus the USD while German Bund yields edge higher.

We expect market volatility to remain elevated for the next few months. We keep our previous EUR/USD range 1,20+ - 1,40-  for the first half of the year.

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