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Is the Euro Rally About to End?

The euro currency could face significant negative pressure as fears that the stagnating euro zone crisis continues unabated and global economic growth remains muted according to analysts.

A one Euro coin stands on a map of Brussels.
Sean Gallup
A one Euro coin stands on a map of Brussels.

The euro has managed to gain some ground in recent weeks from its falls earlier in the year on hopes of further ECB action and as global risk assets have rallied.

On Tuesday, the euro zone reported a contraction in second quarter GDP but the euro edged higher against the greenback at 1.2367 after France and German GDP beat expectations.

Adam Cole, Head of Currency Strategy at RBC told CNBC.com that his central view was for the currency to gradually grind downwards versus the dollar.

“The recent moves have been dominated by short covering rather than fundamental views. The risk of a collapse is small; more likely to grind lower," Cole said.

"There are risks to that, if the Federal Reserve does not give more quantitative easing in September that could induce moves lower as could the troika meeting in Europe next month. It’s a substantial risk that there could be much bigger moves,” he added.

As the crisis rumbles along and talk about a Greek exit from the bloc has intensified, a number of analysts have argued that we could be at a point of reaching parity on the euro-dollar sooner rather than later, a notion dismissed by Jane Foley, Senior Currency Strategist at Rabobank.

“I don’t think we’re going to see parity because we’re talking about global weakness. Look at the U.S. it’s facing a ‘fiscal cliff’ then we’ve got arguments of further (quantitative easing) and that would undermine the dollar.”

Foley says her one month view is for the euro to hit 1.20, but she says the dollar’s problems will keep the euro away from parity against the greenback.

The weaker currency could have the effect of boosting export led economies as their goods regain some competitiveness. In particular, Germany has benefitted from a weaker euro. GDP data released earlier on Tuesday showed Germany's economy grew 0.3 percent over the previous quarter.

“Germany has held up relatively well to other parts of the euro zone. If you go back to the start of the crisis there has been a lot of upside surprises for the economic data and the currency has been part of that,” Foley said.

Jeremy Cook, chief economist at World First also said he doesn’t expect a major move down for the euro.

“We are seeing further pressure on the euro as the market continues to be disappointed by the lack of action out of the euro zone so we may see a further decrease but it doesn’t break the 1.20 barrier. Certainly, the fears of 1.15 and 1.10 are overblown,” Cook told CNBC.com.

He added that once Greece leavesthe common currency bloc – he expects a 70 percent chance of that happening within the next 12 to 18 months - there should be a bounce back for the euro.

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