If you have followed my posts on the Euro in the past on my website, you would know I am not the biggest fan of European Union’s common currency. Yesterday, the ECB announced that it will raise its benchmark interest rate 25 basis points from 1% to 1.25%, becoming the first developed nation to take a step away from easy money policies and toughening its stance on price stability. The news came following an official request from Portugal for an EU bailout after the country saw its 10 year yield rise over 100 basis points over the last month.
As we can see, the Euro has been on a significant uptrend following the initial expectation for higher rates earlier this year. The currency once again is facing a resistance level that it is failed to break during the past few attempts. This is an optimal opportunity to short the currency as I feel it has had too big of a run up for a marginal rate hike while ignoring all the fundamental flaws with the currency.
The key issue that will ultimately have a material effect on the value of the Euro is if there will be further hikes in interest rates from the ECB. Jean-Claude Trichet, the president of the European Central Bank, stated in a press release following the announcement of the rate hike that further rate hikes are inevitable but not imminent. This should give some relief to the rapid rise of the currency, as Trichet basically said that this won’t be one of many steps as the markets were expecting.
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