Eurodollar Rallies Ahead of ECB Rate Decision; Strength Hurting Periphery

by on November 7, 2013 2:00 am GMT

The eurodollar rose on expectations that the European Central Bank (ECB) will withhold from cutting benchmark rates while the eurozone  reports conflicting messages through good and bad data releases. The dollar did not help as it fell from a seven-week hight on concerns the United States GDP figure will come in lower than the previous quarter. The ECB will determine whether a cut in rates from historical lows will be necessary tomorrow.

Only three of 30 economists surveyed by Bloomberg expect a rate cut tomorrow, but Bank of America warns that a stronger euro will do the eurozone no good, more so in the struggling periphery nations.

Bank of America does not think the euro is overvalued yet, but the bank indicates that a potential rise as little as three percent in real effective terms could bring the euro into overvalued territory. The peripheral nations are barely hanging on, and the euro strength this years is beginning to offset any real gains made in recent months.

As the euro moves closer to overvalued territory, unemployment in the 17-nation euro-bloc reached an all-time high of 12.2 percent. The nations that led the eurozone in unemployment are still struggling with youth employment incredibly low:

Eurozone Unemployment Since the Euro's Introduction (PROVIDED BY BANK OF AMERICA).

Eurozone Unemployment Since the Euro’s Introduction (PROVIDED BY BANK OF AMERICA).

Although BoA believes the euro is not yet overvalued, purchasing price parity (PPP) estimates are suggesting that the euro is overvalued as much as 20 percent against the US dollar. The stronger euro is hurting Greece, Span and Ireland.

The markets will see whether or not ECB president Mario Draghi will cut rates. Whether a rate cut is announced or not, his words following the decision will be important to determine forward guidance and whether a rate cut in the near future still remains an option.