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Euro Up On Polluted, Not Thin Air

Published 09/21/2018, 08:39 AM
Updated 07/09/2023, 06:32 AM

The Euro went up a lot recently, EUR/USD by more than 3.5% off August lows, on even less than thin air while fundamentally anything above par is already expensive given the current economic and political situation.

Start With Economics

Seasonally adjusted GDP last quarter in the US was 4.2%, compared to 3.1% in the Euro zone. The US economy is in an upward trend, surely in part due to the tax cuts, while the Euro zone is slowing down.

Even worse for the Euro, the ECB keeps the official interest rate at 0%, Mario Draghi just made it perfectly clear there will be no rate hike for another at least 9 month – this seems to be fixed, no matter what happens. Inflation in Germany, Euro zone’s biggest economy, is already at 2% so you’re loosing buying power holding Euro investments of any sort, thanks to negative real interest rates.

The Federal Funds rate is at 2% and rising, with the interest rate differential growing even bigger in favor of the US Dollar. Southern European banks are basically broke due to their Turkish Lira investments.

The Political Situation

This is even worse than the economic fundamentals for the EUR. The US administration just cut taxes and is at least trying to negotiate more favorable trade agreements while the EU is in a mess like never before. Britain (a net contributor!) is just about to leave the union what just means the remaining “payers” will get a bigger bill to make up for it.

The main political problem is the migration mess Germany created. German chancellor Merkel invited (she actually made selfies with migrants to show everyone’s welcome) more than a million migrants to illegally enter Germany without even registering properly and now she’s desperately trying to unload them on other, smaller European countries – to no avail. Hungary, Poland and others made it perfectly clear they will not take any. The terror attack in Berlin was executed by one of those invited people.

Germany, the biggest eurozone economy, is politically completely isolated and doesn’t get any regulation to help with the crisis. Germany used to have huge power and influence throughout Europe, but that’s over since the migration crisis hit.

To add insult gto injury, the illegal migrants cause huge criminal problems, this is just one example out of many.

The population is getting more and more upset with imported crime and the multi billion Euro bill that comes along with it, eroding Germany’s political power even more. There’s a huge housing crisis in Germany on top of that, a shortage of millions of small, available apartments. Germany’s ruling parties are busy fighting, trying to blame each other for the current situation.

Conclusion

With economic growth, interest rates and political turmoil situation all detrimental to the Euro, one can just wonder about the upward path EUR/USD seems to be on right now. Reality will bite, sooner or later.

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