EUR soars amid Dollar sell-off

The common currency soared above the 1.185 level on Tuesday amid the broad dollar sell-off. With the ECB hinting last week that it is probably now done with its cutting cycle, markets are increasingly betting on a rather swift narrowing in US-EU rate differentials in the coming months, which is clearly a Euro positive.

Indeed, the euro actually outperformed most other currencies yesterday, which we attribute to: a) an easing political risk premium relative to last week (credit rating upgrades for Spain and Portugal offset some pessimism surrounding the downgrade to France’s rating) and, b) some solid Euro Area economic data on industrial production and economic sentiment.

Today’s Euro Area inflation figures are merely revisions to the initial estimates, so will likely be overlooked by market participants. A handful of ECB officials will be making public appearances in the coming days, but we doubt that their remarks will take on too much importance given that the Governing Council appears all but done in lowering rates.

The fallout from today’s Fed announcement will carry far more weight for EUR/USD.