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Flash: The Euro - becalmed now, weaker later - Societe Generale

FXstreet.com (Barcelona) - Societe Generale strategists note that with short-term rates now close to zero, peripheral bond spreads relative to Bunds have become a more important driver of the euro’s performance.

In other words, they feel that the currency’s performance is no longer driven by relative interest rates but by the eurozone credit crisis and confidence in the survival of the system. They feel that the euro will be able to enjoy support for a few weeks and perhaps months, from the prospect and then fact of ECB bond buying as the OMT becomes reality; however, they note that the sovereign credit crisis won’t go away while the spiral of austerity leading to weak or no growth leading to poor budget data continues.

Further, they feel that the next big move in the EUR/USD however will come from the US, not Europe. Both the Fed and ECB are on hold for ‘a really long time’, but the ECB faces bigger economic problems and growth divergence will favour earlier Fed tightening and a stronger dollar from H213 onwards. They write, “That will give the dollar wider-based appeal. As for the euro, how much it lags other currencies in a dollar rebound will depend on whether political solutions to the crisis can be put in place or, as seems more likely, the can simply continues to be kicked down the road.”

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