Hopes for the EU summit are fading, sellers of euros abound, and the European Central Bank's Mario Draghi disappointed today - but here's why the euro could move higher.
There is plenty to dislike about the euro's prospects. Economic indicators from the euro zone have been disappointing, European leaders just can't seem to get it together, interest rates are coming down, and investors are growing weary of the continuing disappointments.
"If a ‘solution’ for EUR were to materialize, EUR would likely pop higher, however the medium-term outlook for EUR would still be to trend lower (we have a 2012 year-end forecast of 1.25)," says Camilla Sutton, chief currency strategist for Scotia Capital, in a note to clients. "The combination of loose monetary policy, a looming recession, fiscal austerity, social unrest and political uncertainty is not the backdrop of a strong currency."
That makes a certain sense — but not to everyone. Brian Kelly of Shelter Harbor Capital is long the euro, and he has no plans to change.
"I would not count the euro zone out one bit. I think the market is incorrect to sell off the euro," he told CNBC's Scott Wapner.
"Even if you do believe that the euro zone is going to break up, if you have a broken up euro zone, what you're left with is a core which will keep the euro that is much stronger than it is now,"he says. That should push the euro higher.
Meanwhile, data from Bank of New York Mellon indicates that the euro is net sold again today, and "we have now seen seven consecutive days of heavy outflows at three times the pace of the average flows in the common currency over the past year." That's a lot of bearish sentiment, and it could mean that sellers will be caught short if, say, the EU summit generates more results than expected.
And that, in short, is what makes markets.
You can listen to Kelly in the videotape above, starting at 3:01.
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