The Reasons for the Incredible Euro Exchange Rate Recovery

Euro exchange rates have recovered in remarkable fashion – we had expected developments over the weekend to feed into sharply lower levels.

We saw some good moves at the Asian open and those with buy orders at higher levels in GBP-EUR will have seen some decent levels executed.

However, through the London session the euro exchange rate complex rallied and showed that resilience that we have often come to expect from the currency.

The pound to euro exchange rate (GBPEUR) has since fallen to below 1.40 - an unthinkable development if we consider just hours before he paur was threatening to break to the best levels of 2015 above 1.43.

The euro to dollar exchange rate (EURUSD) has rallied by 0.25% on last week’s close and is at 1.1195, the rate was as low as 1.0960 at the time markets opened.

This represents a massive bout of volatility for those with euro-based payments and confirms the case for setting buy and stop orders when facing significant international transfers.

Reasons for the Euro’s Strength

Jaisal Pastakia at Heartwood Asset Management has just written an interesting piece on why the euro is showing itself to be stronger than many had expected.

Reasons include investor positioning among hedge funds and the euro enjoying fundamental support as sovereign financing across the broader eurozone economy is much more stable in 2015 than in 2011

Further to this we note that currency markets have been reassured by comments from a number of European policymakers who are keen to downplay the scope of Greek crisis.

Some are even saying a deal is still possible – this includes EU's Oettinger, French Finance Minister Sapin, President Hollande and Spain's De Guindos.

“The euro is also being supported by intervention from the Swiss National Bank who is buying EUR/CHF to actively weaken the Swiss Franc.  Many investors also unwound their long euro positions going into the weekend and on Sunday evening but once the initial move faded, the unwind of short euro carry trades filled the gap in the currency,” says Kathy Lien from BK Asset Management.

However, be under no illusion, there remains a sense of unease and with volatility spiking we believe the prospect of a return to euro weakness remains alive.

“The Greek government's willingness to walk into the fire is a dangerous proposition for Europe and the global markets. We have already seen steep sell-offs European equities and the uncertainty in the coming days will lead to further weakness. So while the EUR/USD recovered, the decline in stocks and rise in bond yields is consistent with our view that the euro should be trading lower,” says Lien.

With the situation remaining fluid we continue to expect this week to deliver FX fireworks.