The state of the Euro as 2014 winds down…

What is the state of the Euro in the months ahead? Our advice: pack a parachute.

Despite being more than six years removed from the financial crisis of 2008, Europe’s collective economy remains in a fragile state. While some of the worst hit nations like Greece and Spain have finally begun to recover from the economic depression that had crushed consumer confidence over that time period, the growth of other nations such as Germany and the United Kingdom has either slowed to a crawl or stalled outright.

With a shocking number of European banks failing stress tests in recent weeks, the state of the Euro hasn’t looked this shaky in years. As such, the value of the Euro has sunk to $1.32 to the American dollar recently, leading investors to wonder, is this the start of a protracted decline in the EU’s flagship currency, or is it merely a short term correction in the face of headwinds that were not entirely unexpected?

In the following paragraphs, we’ll examine the business factors that will likely have a significant impact of the direction of the Euro in the coming months.

Rumors of a round of American-style quantitative easing are rife and widespread

European Central Bank president Mario Draghi has openly mused in recent weeks about using “all the available instruments” at the institution’s disposal to help prop up the continent’s economy, which has floundered over the course of this year.

This has led currency traders to speculate that the ECB will likely begin to purchase government bonds, and perhaps even start up the printing presses to further devalue the Euro in an effort to boost the region’s export businesses.

While no concrete confirmation of this assertion is available at present, the instruments that Draghi spoke of certainly includes these tactics.

Anemic economic growth

While a round of European style QE would certainly accelerate the downward pressure on the Euro, the pathetic collective state of the EU’s economic output has brought the currency to its present lows, and barring an unexpected improvement in the coming year, it will continue to prompt investors to move into short positions against it.

The EU displayed a despondent 0.7% increase in GDP in the second quarter of 2014, all while unemployment across the land has remained above 10%. Far from being a picture of a healthy, robust economy.

Circling the deflation drain

With a lack of good jobs being produced and little to no wage growth present across the European economy, it has set the stage for a deflationary cycle to begin, as consumers sit on their savings waiting for overpriced assets to decrease to reflect their decreased appetite for spending.

With this lack of currency movement, retailers will begin to bid down the price of their goods in an effort to stimulate consumers into spending again. This will decrease the overall value of the European economy, inevitably leading investors to rush towards the exits with respect to the Euro.

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