The euro is now trading at its weakest level since November and is pressured mostly by unfavorable macro data that suggests the region's systemic debt problems have not completely run their course. At the end of last year, currency pairs like the EUR/USD and ETFs like the CurrencyShares Euro Trust ETF (NYSEMKT:FXE) were trading at their highs.
But these moves were driven largely by a massive sell-off in the U.S. dollar, and there is now mounting evidence that traders might have been misled into believing that the euro was on a stronger pace toward recovery compared to the U.S. economy.
The latest evidence shows that both labor markets and consumer inflation numbers have not performed so well as the markets (or even the European Central Bank) had initially anticipated. This ultimately means that the major rallies of last year were without foundation and that we are still in highly overbought territory.
This also means that ETFs like the PowerShares DB US Dollar Index Bullish ETF (NYSEMKT:UUP) is likely to outperform its European counterpart at least for the first half of this year.
Limited progress seen in the jobless rate
According to Eurostat, unemployment in the 17-member region came in at 12% for December, unchanged from the revised numbers of November. An unchanged number might seem to suggest that the region's jobless rate has started to stabilize. But the eurozone has made little progress in its unemployment numbers after hitting the all-time highs of 12.2% last September. This equates to roughly 19 million people without jobs, according to estimates from the European Union.
Of course, this weakness in the labor market is not equal in all areas. Relative strength can still be seen in the countries with the lowest jobless rates -- Austria at 4.9%, Germany at 5.1%, and then Luxembourg at 6.2%.
But when we look at the worst-performing areas, things start to look more alarming. Joblessness in Greece is still at 27.8%, while Spain rests just below at 25.8%. In addition to this, consumer inflation numbers are now seen rising at a tepid 0.7% (below the 0.9% markets were expecting), and well below the central bank's target rate of 2%. This creates a scenario where the European Central Bank will not raise interest rates in the near future, which is a strong negative for the currency.
In fact, the slow inflation number ultimately suggests that we could see increases in stimulus programs. This would create additional negatives for the currency, as money supply would expand. This does not mean, however, that the euro should still be sold against all of its major counterparts.
I have written previously about the price floor that has been put in place by the Swiss National Bank. This will keep euro ETFs supported relative to instruments like the CurrencyShares Swiss Franc Trust (NYSEMKT:FXF), so it is important to select the right alternatives when looking to bet on further weakness in the euro.
U.S. dollar-based ETFs still make the most favorable option, given that relative GDP performances are still strong and that the U.S. Federal Reserve has shown a clear commitment to tapering its quantitative-easing stimulus programs.