So, How High Can The Euro Go?

The euro staged a remarkable rally today after dipping as low as 1.4060 following the U.S. non-farm payrolls release. The resilience of the single currency is incredibly impressive considering that Standard & Poor’s downgraded Ireland’s sovereign debt rating and Fitch warned about the possibility of their own downgrade in the near future. Both rating agencies currently have Ireland at the same level but a downgrade by Fitch would move Irish debt one step closer to junk.

However none of these rating actions have deterred forex traders from buying euros in anticipation of the first rate change in nearly two years. At the last monetary policy meeting in March, ECB President Trichet said interest rates could be increased as early as April. Since then, the central bank’s message has been very consistent with a number of ECB officials reiterating the need for tighter monetary policy. In contrast, the Federal Reserve is still debating whether QE2 should be cut short. Although many members of the Federal Reserve have grown more optimistic, there are also a number of Fed officials who believe that caution is warranted.

As a result, the best that we can expect from the Fed won’t nearly be as hawkish as the least that we can expect from the ECB. The better than expected U.S. non-farm payrolls report on Friday helped to lift the dollar against the euro but we believe that the EUR/USD could make a run for fresh year to date highs ahead of the ECB’s rate announcement on Thursday. The direction of interest rates is one of the most important drivers of currencies and investors usually prefer to invest in currencies where the interest rate is high and growing and the euro certainly fits the bill. Aside from the ECB rate decision, Eurozone retail sales, German factory orders, industrial production and the trade balance are also scheduled for release. Baring any major downside surprises, the euro should be on its way to a new year to date high. After the rate decision however, the euro could weaken if a classic buy the rumor, sell the news dynamic takes hold.

This chart shows how rate hike expectations have changed in recent weeks:

In terms of how high the EUR/USD can rise, there is a VERY good chance that the currency pair will make a run for its Nov high of 1.4282. If this level is broken, then it could be clear sailing to 1.45

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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