The euro has become the most interesting currency among G10 for the past 24 hours. The ECB's president Christine Lagarde has increased speculations that the bank could be increasing the interest rate as soon as the end of Q3.
This means that the era of negative rates could soon be coming to an end, a particular factor that has pushed the euro higher against most G10 currencies. But here is a dilemma that traders need to pay close attention to before they can begin placing large bids on the single currency—Is the Eurozone's economy strong enough to withstand the shocks of higher interest rates after such a long period of them being lower?
Yes, yesterday's IFO Business confidence survey from the biggest economy in the Eurozone has suggested that economic situations aren't that dire, with the number coming in better than expected.
But the reality is that it is one number, and Germany doesn't necessarily represent the entire Eurozone. We think that the further price action for the euro could look very similar to that of sterling, which began to move higher initially when the bank announced increasing the interest rates.
But now, sterling has lost its mojo, and despite the Bank of England increasing the interest rate a few times this year, it is struggling to move higher against the dollar.
The reason is simple, the actual economic conditions in the UK are deteriorating with every passing day, keeping the selling pressure on the BOE. The BOE, on the other hand, has no other option but to continue to increase the interest rate to bring inflation lower. In addition, we have Brexit woes that adversely influence the economic situation, not to mention the conflict between Russia and Ukraine.
The euro is no different, so even though we do see some bids pushing euro prices higher against the dollar and sterling, we think it is likely that this trend may not last long.
The risk of the euro/dollar pair hitting parity is still very much on the table, and the odds are still strong that this time we could see it realized.