The Scale is Tipping Towards The Euro

The EUR/USD may get very bullish if we take into consideration that the balance of pros and cons favor the Euro. While the US concerns about sub-prime lending and the housing market continue, positive economic reports are coming out of Europe. The German IFO report shows a healthy manufacturing sector and strong business confidence. This was despite worries that the raise in German taxes would hamper the results.

Meanwhile new home sales in the US were reported lower as well as consumer confidence although the latter may be very well tied in with the first. Consumer confidence may very well be a result of increased volatility in the markets and increased negative press coverage. By human nature consumer confidence can be swayed by such factors. The just released Durable goods orders was also a poor reading, although it represented a rebound from the previous report. More importantly than the indications of a slowing economy is the increased variation between actual results and expectations. What really drives the market is anything that strives away from market expectations. Also, we can not take lightly the fact that the revisions to previous results were made to the downside. These add more impact to the already negative results.

Looking at interest rates, it is becoming clearer that the US can not afford to raise rates again. For one part, it will definitely not help the sub-prime lending market. Most likely the FED will not lower rates either as inflationary pressures remain. On the Euro-side, the International Monetary Fund supports further monetary policy tightening for the euro. This supports the hawkish BCE view and we can expect to see them raise interest rates to 4% in April.

With US rates remaining at 5.25% we will continue witnessing a decreasing interest rate differential. Although the EUR/USD is breaking upwards, it is surprising that the USD is not taker a harder hit. Rarely do the scales tip so far to one side. Some resistance may be due to the EUR/USD closing in on all-time highs but more likely analysts are waiting for what FED president Ben Bernanke has to say as he can cause some volatility.