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Euro/USD heading towards 1.40.

Currencies Direct September 5th 2008 - 3 minute read

Euro/USD heading towards 1.40…

There is at present a worrying divergence away from near term fundamentals and the strength of the US Dollar. It would be wonderful to think that the market had extended its time horizon for trading currencies to encompass a more long-term view point but this seems unlikely. A more probable reason for the continued strengthening is the fact that players are making money by buying it – Let The Trend Be Your Friend, as they say. The downside to this strategy is of course, that without a fundamental basis for buying, the profit taking/selling is invariably just as severe. Watch for a reaction should the US non-farm payrolls this afternoon be worse than the -75K predicted.

On to actuals, the statement yesterday from the ECB following their Rate Meeting were neutral going on dovish. Trichet came out with his usual push-me-pull-you type statement, ensuring that the market were kept certain of the ECB’s inflation fighting credentials whilst also emphasising the problems of the slowing economy within the Eurozone (following on from the reporting of the 8th straight monthly decline in German Industrial Orders). The EU’s Juncker was more forthright however. He stated that 1.44 reflected economic fundamentals better than 1.60 had done and that the Euro was still overvalued against the US Dollar at these levels. Cue further Dollar buying. Sterling was also caught in the backwash of Dollar buying and even though it hardly moved against the Euro yesterday, hit a 12-year low against a basket of currencies on account of the Dollar’s weighting within it.

Mixed comments within speeches from Fed members Fisher and Yellen. The former remains hawkish, noting that the Fed must not get too excited about lower inflationary prospects following the decline in commodity prices as these price declines might not be sustainable. Yellen had a much softer prognosis saying that she didn’t think that the current Fed Funds rate was accommodative, that the prognosis for inflation had improved and that interest rates needed to be adjusted to reflect the US economy’s current outlook.

There was continued grim news on the housing front with the Halifax survey showing that UK house prices had fallen by a further 1.8% in August leaving the average house price a staggering 12.7% lower than it had been in August 2007. Despite the gloom and doom in the news on the outlook for the UK, the MPC left Sterling interest rates at 5%. The minutes of the meeting will not be released until 17th of this month and I still expect to see a 3 (for a cut of some magnitude), 5 (no change) 1 (rise) voting pattern.

The outlook for global interest rates is being updated all the time but at present the view is for substantial cuts both here and in Eurozone over the next 12 months period with expectations that UK Base Rate will be at 4% and that the Euro Discount rate will be at 3.5% by the summer next year. There are expectations that we will see cuts in the US and Sweden and that the rate tightening cycle in Australia is over. All in all, the outlook is for substantially lower rates going forward with the possibility of yield curves becoming inverted or negative at the longer end.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. Currencies Direct cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. Currencies Direct cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

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Currencies Direct

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