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FX Daily Update

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Time to Buy the Euro?

Wed, Dec 17 2008, 08:32 GMT
by Lena Manousarides

FXstreet.com Independent Analyst Team

What a day we had yesterday, with Euro bulls clearly back in control after the FED meeting, which saw the pair advancing more than 400 points and printing yet another multi-week high at 1.4150. In a surprise move yesterday, the FED showed its true agenda by easing the rates by 75 points leaving traders dumbfounded and the dollar in a slump. The interest rates are now at the lowest level ever – just 0.25% - and according to the statement after the decision, the bank is considering keeping the rates this low for some time and even taking a braver path and easing closer to zero!

EUR/USD has broken important resistance levels of 1.40 and moved another 150 points in a few minutes stopping only at the next important level of 1.4150 which was the 50% correction from the 1.6040 down to 1.2330. The European currency is looking strong and looks set for more gains towards 1.43. In order to say that the rally is sustained, any corrections on the downside should not fall below 1.3870 which should work as a good support level for now.

The FED has certainly delivered and therefore traders reacted in the aftermath of the decision in the only way possible. The very fact that interest rates differentials have changed dramatically in terms of the euro versus the dollar, makes the dollar less desirable to hold and EUR/USD a new profound carry trading pair! Trichet himself told the markets yesterday that ECB is thinking of pausing any further easing for now until new developments unfold and with FED keeping a zero stance, dollar cannot justify big gains from here onwards. Fundamentally speaking, we know the economy is deteriorating, inflation is nonexistent, unemployment is high, the credit crisis deepening and after the hefty rate cut the greenback cannot be used as a safe haven currency making traders search for a better yield.

Today the economic calendar has some important news out of the UK, with MPC minutes keeping traders at edge and also CBI realized sales. The pound has gained a lot against the dollar; however traders are aware of the UK economic conditions and the fact the bank may also pull a FED-style zero rate policy which could hurt the pound immensely. The real situation of the pounds weakness is showing through EUR/GBP, the pair which in the last year has appreciated more than 20% to new record highs and is now threatening to head towards parity.

It will be interesting to watch the reactions of the European markets this morning and also how the US will play the latest developments. I said in the previous months, that the euro rise will come unexpectedly and much like the boy who cried wolf, many traders may miss it as they will not believe it's happening! It looks like this week we have seen this scenario unfolding and the more the euro was rising, the more traders were reluctant to believe there is more to come. Well, let’s see where that rally takes us from here and if the dollar fights back; my feeling is that there is more upside to come and any corrections on the downside could be used as simple corrections.

Published on  Wed, Dec 17 2008, 08:36 GMT