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Daily Currency Market Focus
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EUR/USD: Headed for 1.35
Fri, Dec 12 2008, 08:56 GMT
by Kathy Lien
The not so dovish comments from ECB member Weber is driving the EUR/USD through the roof. The currency pair is up close to 2.5 percent or more than 300 pips.
After cutting interest rates by 75bp earlier this month, ECB member Weber said today that a January rate cut is not a done deal. He pointed out that the ECB has never taken interest rates below 2 percent and that the central bank doesn’t have enough info to decide on a January rate cut. Market tensions are expected to ease next year and he really wants to avoid negative real interest rates. More importantly, he added that when the economy recovers, the ECB will need to raise rates promptly.
In terms of monetary easing, the ECB has been one of the least aggressive central banks this year. They have only cut interest rates by 150bp, compared to the 325bp by the BoE. Interest rates are behind the move in EUR/GBP as the spread between 3 month euro rates and 3 month UK rates go from negative to positive territory (see the tight correlation in the chart below). This is why EUR/GBP is moving closer to my 0.90 target.
With the Fed cutting interest rates next week, the hawkish comments from the ECB will fuel further gains in the EUR/USD going into the US rate decision. There is nothing standing in the way of EUR/USD hitting 1.35 as long as the Fed continues to liberally cut interest rates and the ECB remains nimble.
Published on Fri, Dec 12 2008, 09:02 GMT
Archive
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Published On Tue, Jan 27 2009, 16:29 GMT - USD/JPY: Keeping Its Head Above Water Thanks to BoJ
Published On Fri, Jan 23 2009, 14:17 GMT - What's Behind the Big Moves in Currencies?
Published On Thu, Jan 22 2009, 08:17 GMT - British Pound: How Much Further Can It Fall?
Published On Tue, Jan 20 2009, 14:49 GMT - Euro Tanks as Spain Gets Downgraded: What Does It Mean to Be Downgraded?
Published On Mon, Jan 19 2009, 15:18 GMT
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eurusd, ecb, interestrate, eurgbp
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