Euro Interest Rate Speculation Raises Value

Posted by Rob

June 9, 2008

Euro The euro traded near a two-week high against the dollar on speculation that the European Central Bank will raise interest rates this year.

At present the euro benchmark rate sits at 4 percent, however, inflation has risen at the fastest pace in 16 years. Futures traders expect the ECB to raise the benchmark interest-rate twice this year, with a target of 4.5 percent.

An interest-rate increase next month is “possible,” Trichet said in Frankfurt last week. It was a message that the markets have understood “quite well,” ECB council member Nout Wellink, who also heads the Dutch central bank, was quoted as saying in an interview with market News International. - Bloomberg

The dollar saw signs of recovery last week, spurred on by comments made by Fed chairman Ben Bernanke and treasury secretary Henry Paulson. However, this temporary strength has seen a sharp reversal since June 5th.

Despite the Fed’s concern at the weakening dollar, many traders remain bearish for the dollar, and are looking for a strengthening euro. This would especially be the case if the ECB raise interest rates at their next meeting.

Technical Chart: EURUSD 1-hour

EURUSD 1-hour (09-06-08)

Looking at the 1-hour chart for the EURUSD, we can see that the price has just broken below the rising support line.

A look at the stochastic shows some negative divergence, which would indicate a slow-down in the rising trend. The recent peaks on the stochastic are much lower than previous peaks, this is in contrast to the price action, where the price has continued to rise.

Now that the price is below the rising support line, we may be seeing a retracement that could reach down towards the 23.6% or even the 38.2% Fibonacci line.

With the ECB likely to raise interest rates along with speculation favouring a stronger euro, looking for long positions looks like the better trading option.

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