Euro/US Dollar Monthly Technical Forecast
After posting life-time highs by 1.6040 in July 2008, the market has reversed course sharply to undergo some significant pullbacks reaching 1.2330 (2008 low, October) thus far ahead of the latest multi-month consolidation. It now looks as though a lower top is firmly in place by 1.4720 (December 2008 high) to be confirmed on a break back below 1.2330. Below 1.2330 will open a fresh downside extension towards initial support by 1.2000-1.2130 (psychological barriers/100-month SMA/50% fib retracement of major 0.8230-1.6040 move), and then to the 1.1640, November 2005 lows further down. Only back above February's high by 1.3095 delays bearish structure.
Euro/US Dollar Interest Rate Forecast
The correlation between the EUR/USD and interest rate outlook continued to weaken as the single currency gradually fell throughout the month despite a slight improvement in interest rate expectations. The ECB refrained from further easing in February which kept market expectations in check as President Trichet in January made it clear that the next policy meeting to watch would be the March “rendezvous”. Risk appetite has been the main driver of price action for the EUR/USD and that correlation is expected to remain under current market conditions.
Nevertheless, traders will focus on the upcoming policy rate decision as it may give insight into the state of the European economy as concerns have emerged that troubles in Eastern Europe will negatively impact their western counterparts. Credit Suisse overnight index swaps are predicting 43 bps of further easing over the next twelve months by the ECB versus expectations that the Fed will raise rates by 41 bps. This is primarily based on the belief that the U.S. economy is best poised to emerge from the current crisis and a dour outlook from President Trichet would reinforce this sentiment. However, an aggressive rate cut by the ECB could minimize the impact of future interest rate expectations and leave risk appetite as the sole driver of future price action.
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