The biggest FX play of 2014: EUR/USD.

8 months later and the euro can only buy 80% of the dollars it could back in May 2014, but what has been behind this huge move? And where can it go in 2015?

1    Why the big move?

The big move has been based on investors views of the two differing economies and what stage they are at in their economic development post crisis. On the Europe side, investors have seen a loosing of monetary policy with ultra-low rates and an asset buying programme of 60bn euros a month (QE). Overall a very dovish central bank. But then these investors look to the USA and see a completely different story; GDP @ 5%, inflation around 2% (pre-oil shock) and a central bank feeling hawkish with a plan to raise the rate maybe in 2015 and also turning QE tap off in the bank end of 2014.

This complete divergence is why investors have shifted their euros to dollars in the classic carry trade. 

Here in this chart you can see the currency fall from a high of 1.3930 to a low last week of 1.1116.

Along with this clear interest rate/economics trade, there has been another big factor which was the Swiss National Bank unpegging its currency to the euro, in a clear signal that shows the Swiss cannot realistically value their currency at the devalued euro. This moved the euro even more against the dollar.

1   Where can the currency go in 2015?

This is the big question on currency traders’ minds across the world. From a fundamental view point, nothing has changed. Europe is still in the position it is and has only just announced its QE program, suggesting there is much more devaluation let to play. Also the Fed still is to raise the rate which would again see great strengthening on the US dollar. In fact the dollar is set to have a great year in 2015, as it outstrips all major economies in terms of growth.

The problem investors see is whether all this information has already been priced in. All of this information is already available to the market and investors have traded accordingly, therefore the question is with no new information, there should be no reason to see a big devaluation.

On the psychological view point (which is one of the major influences in the currency markets, especially medium-term) when there has been news flow all pointing towards one trend, a small piece of information in the opposite way can cause a big move.

Overall I believe this will still be down trending in 2015. Not at anywhere near the same pace, however there are too many expected/potential events that will happen in 2015 that make me bearish the euro against the dollar:

       Fed rate rise?

2       Continued Deflation in Europe?

3      German recession?

4     Uneffective QE?

5       Greece exit worries again?

6       Increased GDP in US?

Therefore on my recommendation I would hold this trade over the next year until something fundamentally changes at which point will be the time to re-assess.