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Week after week I have called for the EUR/USD to break 1.60. Today, the currency pair hit an all time high and is inching ever so closer to that target. It will just be a matter of time before that level is broken at which time intervention risk will increase substantially. Hot Eurozone CPI numbers and weaker US data drove the EUR/USD to its latest milestone. Inflationary pressures in the Eurozone have never been this strong and because of that, the ECB will be in no rush to cut interest rates or to stop the Euro from rising. With both oil and rice prices climbing to another record high, the central bank will only tighten their leash on monetary policy. Rate cuts are completely out of the question and the only thing that can stop the Euro from rising is intervention.
We have previously mentioned that the European Central Bank’s pain threshold for the Euro could be as high as 1.62. In 2004, the last time the central bank become extremely worried about the movements in the Euro, the currency had rallied 13 percent in 2 months. In the past 3 months, the EUR/USD only rallied 10 percent; a 13 percent move would put the currency pair at 1.62.
As for the US dollar, concerns about the housing market, rising oil prices and the pessimistic outlook by the Federal Reserve districts are all weighing on the dollar.
Although inflationary pressures are a big problem across the globe, the latest consumer price report from the US indicates that the rise in prices has yet to hit the consumer in meaningful way. The numbers are a bit surprising since price hikes have been reported by companies ranging from Kimberly Clark to Hershey’s. The tamer the growth in CPI, the more concerned we are about producers shouldering the cost of rising prices.