The euro has enjoyed a nice rally in 2017, up recently almost 3.7% for the year.
And if you read the headlines, Europe seems to be headed for a solid 2017, even after the U.K. invoked Article 50 – officially starting divorce proceedings from the European Union.
But everything isn’t really candy cane forests and gumdrop mountains in the Eurozone.
Not by a long shot.
In fact, a year-long rise in the Eurozone’s annual rate of inflation came to an end in March. Consumer prices were 1.5% higher than a year earlier, a sharp fall from the 2% rate seen in February. This increases the likelihood of the ECB sticking with its loose monetary policy for the near term.
And let’s not forget about the French election, which, depending on the outcome, could mean the euro’s on borrowed time. If Marine Le Pen pulls off a victory, the euro is toast.
But, even if the French elections go the way of the Netherlands, the fundamental flaws of the Eurozone remain, notably:
Unsustainable debt levels – It’s not just Greece. Italy, Portugal, Cyprus, and Belgium also have debt levels larger than their country’s GDP according to the latest data. And as a whole, the Eurozone has a government debt-to-GDP ratio of over 90%.
A bankrupt banking system – Italy is on the brink of an enormous public bailout of its toxic-loan-riddled banking sector. Without a bailout, we could see another full-blown financial crisis that could bring down the European financial system.
Diverging competitiveness remains unsolved – The EU has failed to address the gap in competitiveness between the lean north and the bloated south.
To make matters even worse, the complete failure of the EU to address the migration issue leads me to think that the Eurozone is on a path toward another lost decade.
From a technical standpoint, the euro is toast. Take a look at a weekly chart of the euro below. You can see that the euro has been in a downtrend against the U.S. dollar since 2014, the long-term trend has not been broken.
The bottom line: the recent rally in the euro is nothing more than a bounce in a long-term downtrend that ultimately leads to the end of the euro currency. So, don’t fret if the euro rallies a bit further from here, even if it temporarily breaks above the downtrend line shown above – it’s nothing more than a short-term bounce. Remember, false moves like these are made to shake people out of the trade, before the true trend is revealed.