How the Strong Euro Changes Things

The EUR/USD has reversed violently after hitting a high of 1.4719 today. I don’t think that it is a coincidence the currency’s rally stopped right at the 200-day SMA.

If you caught my Daily Currency Focus yesterday on GFTForex.com, I wrote about the consequences of a strong euro. I think its important for everyone to give this a read:

The Euro’s recent rally is a testament to the impact of interest rates on currencies. We have long said that this is the number one driver of currency trends and the decline in liquidity near the end of the year has only exacerbated the rally.

Although the latest move in the Euro has some bank analysts revising up their EUR/USD 2009 forecasts to 1.60 and above, we want everyone to realize that the higher the EUR/USD rises, the more strain it will put on the Eurozone economy and the more reason it gives to the European Central Bank to cut interest rates. When the ECB first started to talk about pausing in January, the EUR/USD was trading around 1.26 and it has now appreciated 14 percent. Even though we also believe that the EUR/USD will continue to rise, we think that it may have a difficult time cracking above 1.48 and eventually, the trend will change. France’s largest bank BNP Paribas has been hit hard by the Madoff scandal. This is an example of the troubles plaguing European corporations. Consumer prices declined 0.5 percent last month, giving the central bank plenty of flexibility to cut interest rates if necessary.

Update today: The fact that the German IFO business confidence report also hit the lowest level since 1982 only confirms my belief. According to Barclays, the 11% rally in the trade weighted Euro is akin to a tightening of 175bp!

Watch out for a shift in ECB rhetoric. I still think that the US dollar is headed lower in 2009, but that does not preclude a retracement in the Euro that is driven by a surprisingly abrupt shift by the ECB’s stance on their January rate cut stance.

About Kathy Lien 236 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of DailyFX.com, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Investopedia.com Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for Tradingmarkets.com, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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