Without doubt, forecasters looking at the EUR to the USD exchange rate have been challenged. The current economy has made this job tasking and considering the history of this exchange rate and the obstacles it has faced it is easy to see why. Prior to 2009, two factors were strongly linked. For one, interest rates have had differences, which have strongly influenced all of the foreign exchange markets.
If you look at the history of the EUR to the USD exchange rate starting in 2005, you would see the policies at that time actually had a lot to do with the exchange rates of today. During that time, risk-taking behavior was much different from what you see today in a difficult financial market. Then when you look at the start of 2008, forecasters saw some of the elasticity of the EUR to the USD take a significant fall, actually moving in the opposite direction of risk aversion.
However, from 2008 to today, levels slowly and cautiously began to reach normal levels and by the summer of 2009, numbers were around where they leveled off at the end of 2007. Throughout the time from 2005 to 2010, forecasters were concerned because of the huge fluctuations specific to risk aversion. Obviously, this plays a significant role in movement for the EUR to the USD exchange rate. Keep in mind that during this difficult time, the attitude being taken toward risk taking not only affected the EUR to USD exchange rate, but most foreign markets.
Now moving into the early part of 2010, forecasters agree that not only the EUR and USD, but also the Sterling and British Pound have seen improvement. Some forecasters are going as far as saying the stabilization between the EUR and USD is “bust to rebound”. The last one and one-half years have been extremely hard especially for the housing and credit markets. Keep in mind that while some improvement has been seen and most forecasters are optimistic, the dramatic decline for credit demand seen in 2009 will still take time to recover.
The good news for investors of property, the EUR to USD exchange rate has been rough but this situation has also forced a time of purging financially and healing. Because of this, deleveraging without households and increased wealth has been somewhat restored. This coupled with some increase in income; consumers are beginning to gain confidence when it comes to spending.
The forecast for the EUR to USD exchange rate is still bearish although some market prices are now suggesting that this exchange pair will keep trading off risk sentiment when looking at broad markets. The one thing to note is that because of the global financial crisis, the connection between interest rates and the Forex market has faded. For this reason, the prediction to the middle of 2010 is that the EUR to the USD exchange rate will see interest rates become equal.
In summary, the rolling 50-day connection of the EUR and USD exchange rate, along with the S&P, forecasters expect broader risky assets. This means that exchange rates will be more sensitive to financial flows in a broader perspective. Although some evening out has been seen, experts still stay that for some time, that markets will be irrational. Sharp prices are expected across primary Forex pairs but as far as when the EUR and USD will once again see good growth and maintained stability all comes down to timing.
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