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Wednesday 27 August 2008

Euro Dollar Could Reach 1.40 Once The ECB Starts Cutting Interest Rates

Recent economic data points towards a weakening of real GDP growth in the euro zone economy and a more accommodative monetary policy could be needed to prevent the region from falling into a recession. Our trading recommendation is to sell EUR/USD at the market for 300 pips in profit potential with a stop in a daily close above 1.48.

Earlier in the day, German’s Federal Statistics Office reported that Europe's largest economy contracted by 0.5 percent quarter on quarter in the April-June period. Later, the euro dollar broke below 1.46 after the IFO Survey showed that business confidence in German fell to a three year low. Despite the recent easing on energy prices the ECB remains very concerned with inflation but the recent economic data has been so bad that the Governing Council of the ECB could be pressured to review its monetary policy. In fact, traders expect the ECB to cut rates by nearly 50 bps over the next 12 months, according to overnight index swaps.

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Euro Dollar Falls to a 6 Month Low

Today, the U.S. dollar climbed to a six month high against the euro on speculation the European Central Bank could have to cut interest rates to prevent the euro zone economy from falling into a deep recession. Indeed, earlier in the day, German’s Federal Statistics Office reported that Europe's largest economy contracted by 0.5 percent quarter on quarter in the April-June period. Later, the euro dollar broke below 1.46 after the IFO Survey showed that business confidence in German fell to a three year low. Despite the recent easing on energy prices the ECB remains very concerned with inflation but the recent economic data has been so bad that the Governing Council of the ECB could be pressured to review its monetary policy. According to overnight index swaps, traders expect the ECB to cut rates by nearly 50 bps over the next 12 months. On the other hand, the next step by the Federal Reserve policy makers will be to raise interest rates, according to minutes of the Federal Open Market Committee meeting released today. Looking ahead, lower interest rate differentials could make the euro less attractive to foreign investors and the lower level of demand for assets denominated in euros could accelerate the losses in the EUR/USD.