2009 Euro Forecast – EUR/USD

How Did the Euro Trade in 2008?

Exactly one year ago, the Euro was trading at approximately 1.47 against the US dollar, 5 percent higher than current levels. In 2008, this type of move is considered mild especially when compared to the Euro’s 20 percent rally against the British pound and New Zealand dollar and 27 percent decline against the Japanese Yen. However the mild year over year change in the EUR/USD masks a tremendous amount of volatility during the year. In the first half of 2008, the EUR/USD soared to a record high above 1.60. After that, it fell 22 percent to a 2 year low but recovered more than half of those losses in the month of December.

Eurozone’s to Underperform in 2009, Expect a Prolonged Recession

It is no secret that 2009 will be a tough year for many countries, but things will be particularly difficult in the Eurozone. Every major central bank has cut interest aggressively, driving their currencies significantly lower in 2008. The ECB on the other hand has been reluctant to follow suit, leaving the Euro only marginally lower for the year. Although the Eurozone is in a recession, growth has not been nearly as weak as the US. Annualized GDP growth in the Eurozone during the third quarter was +0.6 percent, compared to -0.5 percent in the US. The Eurozone’s outperformance in 2008 however could be short-lived as the central bank forecasts a 1 percent contraction in growth next year. As an export dependent region, the strength of the Euro will make a recovery difficult. German companies have already scaled back production as global demand eases. Looking ahead, unemployment is expected to rise, slowing consumer spending and forcing the ECB to continue to cut interest rates. If German unemployment hits 9 percent, we could easily see Eurozone rates hit 1 percent.

ECB Could Become One of the Most Aggressive Central Banks in 2009

Next to the Bank of Japan, the ECB has been the least aggressive central bank in 2008, having cut interest rates by only 150bp to 2.5 percent (counting the 25bp rate hike, their total easing is 175bp YTD). Compared to the 400bp rate cut from the Federal Reserve and the 350bp rate cut from the Bank of England, the ECB’s nimble move singlehandedly prevented the Euro from collapsing alongside the British pound, New Zealand and Australian dollars. However in face of slowing growth, it will be difficult for the ECB to hold onto their conservative monetary policy stance – they are expected to cut interest rates by 100bp in 2009. The ECB was behind the curve in 2008 and the biggest risk for the Euro in 2009 is whether the central bank’s sluggish policies catch up to them. In December, the EUR/USD soared on speculation that the ECB may refrain from cutting interest rates in January. At a time when everyone who still has room to cut interest rates are cutting them, a pause by the ECB could spur a EUR/USD rally above 1.45. However, with that in mind the ECB first hinted about pausing when the EUR/USD was trading at 1.25. The 13 percent rally in the currency pair since then increases the chance of a rate cut because a stronger currency hurts the economy. But a pause does not mean an end to the easing cycle. Beyond January, we still believe that significantly slower growth will force the ECB to cut interest rates by another 100bp. More importantly, the ECB will be cutting interest rates at a time when the Federal Reserve and the Bank of England are done easing. If the Eurozone underperforms the US economy in the second half of the year and the ECB is still cutting interest rates, a prolonged recession and prolonged easing could lead to a major reversal in the EUR/USD in 2009. Only if the economy proves to be resilient or if another major shock hits the US economy can we see a new high in the Euro.


Inflation Could Remain above ECB’s Target in 2009

One of the primary reasons why the ECB has been reluctant to ease rates aggressively in 2008 is inflation. The central bank has a 2 percent inflation target and consumer prices remained above the target throughout the year. In fact, the ECB became so alarmed in July when annualized CPI soared to a high of 4 percent that they raised interest rates by 25bp. Although the fall in oil prices has driven inflation lower by the largest amount in 20 years, CPI is still expected to remain above the ECB’s target in 2009.

Be Careful of a Run on the Dollar

Another major risk next year is a run on the US dollar. The global slowdown has forced many central banks around the world to become internally focused. This means that any excess money will be spent on spurring growth domestically instead of funding the US deficit. With next to zero yield, a deteriorating balance sheet and the risk of a weaker dollar eroding the notional value of any US investments, there are almost no reasons for foreign investors to load up on US debt. Having been burned badly by investments in Fannie and Freddie Mac, sovereign wealth funds like China have become skeptical of buying more US paper. According to an editorial in the state owned newspaper, China Daily, “China’s increased purchase of U.S. Treasury securities should not be interpreted as an endorsement of the assumption that the U.S. can borrow its way out of the current financial crisis.” If dollar demand continues to wane, it is another factor that could drive the dollar lower in the first half of 2009.

Political Risk

There will be 2 elections in Europe in next year– the election for the new Chancellor of Germany and elections for European Parliament. In Germany, Chancellor Angela Merkel is expected to take on her foreign minister Frank Walter Steinmeier. With an economy in turmoil, it is difficult to tell who will win but if it is another close election like one in 2005, we could see the Euro come under selling pressure. When both Merkel and Schroeder declared a victory in September 2005, the EUR/USD plunged as political uncertainty hit the currency. The European Parliament elections in June will be the largest transnational democratic election in history with over 700 members set to be voted in by 515 million EU citizens. For the currency market, the only implication is the possibility of legislative activity coming to a standstill in the spring as the European Parliament prepares for the election.

For my EUR technical forecast, read the full report on gftforex.com


  1. Hey Kathy,

    Happy New Year!

    another political risk that could hit the eurozone is that a greatly Eurosceptic Czech Republic President, Vadav Klaus, will have the EU presidency for the first half of the year.
    he is against the Lisbon treaty signed by most european countries and could jeopardize further European integration.
    So tension could occur during his presidency as he likes to be in the spotlight… surely something to watch.

  2. hello
    i want your advice , im from kuwait i have a USD i dont need it know , do i change it to Kuwaity dinnar know or i wait may be the dollar will increase this year ?
    Also i need the Euro all the years do you advice me to change the kW dinars to Euro and keep it know or i wait may be it will get lower later ?
    thanks & good bye

  3. Hello,
    i need your advice , i have a Euro deposite now with very low Bank interest rate 0.5% per year .I need Euro after one year from now.!
    Do you advice me to change it to USD or other currency , and at the end of 2009 rechange in Euros?!
    Thanks with best Regards

  4. Dear Kathy,

    I hope you are well.
    I Need your advice.
    i am from Iran.
    i have euro and i dont need it right now but i want to know if euro goes up or down in near future ?
    i really dont know if i should change it to Iran Rial or it s better to have this money in euro.

    I hope to have your reply very soon

  5. Hello Sir,

    I want your advice

    Should I Sell ERO or BUY some more?
    what are the chances of increament of ero in near future?


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