EUR/USD Could Extend to 1.40

The EUR/USD is on a tear, having rallied more than 600 pips or 5 percent over the past 24 hours. The significance of Fed’s actions continue to resonate over the currency markets and even though we have already seen parabolic moves in the pair, I think it will head higher.

Why?

On December 16th, when the Fed first brought up the prospect of buying U.S. Treasuries at their FOMC meeting, the EUR/USD rose from a low of 1.3629 to a high of 1.4719, an 8 percent move. Now that the Fed is actually following through with buying longer term Treasuries, the impact on the EUR/USD should be the same if not greater.

We have seen a similar reaction in the British pound. After officially announcing Quantitative Easing, the GBP/USD fell 650 pips, a move of only 4.5 percent. However the price action of the GBP/USD has been diluted by the weakness of the greenback and so a more accurate reflection of the market’s appetite for British pounds post Quantitative Easing can be found in EUR/GBP which has rallied 8 percent since the March 5th Bank of England meeting.

Source: eSignal

Source: eSignal

Therefore an 8 percent move in the EUR/USD post FOMC would take the currency pair to at least 1.40 from Wednesday’s low, which is my target over the next few trading days.

Source: eSignal

Source: eSignal

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4 Comments

  1. I had thought CEE (central and eastern Europe) problems would impact EZ too, but Goldman Sachs EMEA team estimates total credit losses by EZ banks in CEE will not exceed 1% of EZ GDP.

    however, there are other EZ-negative elements that come into play:
    ECB is way behind the rest of the G20 in QE. FT articles talking about it being the last to emerge from recession if it doesnt get on board. EZ could suffer deflation and exporter risks. German industrial slump extending, and EZ GDP estimated to drop by 2.7% in 09, flat in 2010. but will ECB do anything significant? they’re a strict inflation targeter, and unlikely to act w/o Eurogroup approval. good luck with that and Merkel…

    So first the BoE executes QE, then the SNB intervenes, then the FOMC. Can the BoJ be far behind??? they’ve got to be upset now with $/jpy back down at 94.60!

    and so, two plays might be long CAD/JPY (76.38, near 10 yr low and 5,000 pips off the 126 high) and CAD/CHF (at .9000, near 10 yr low, 3500 pips off 1.25 high in 07), CAD strengthening of late, and we expect both CHF and JPY to weaken

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  2. The Euro going up is actually most likely a negative for one of the largest member nations, Germany. This makes exports more expensive, and is quite negative for a manufacturing economy. I wonder how thrilled Germany is about all this.

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