After a four day rout against the US dollar, the Euro is making somewhat of a comeback in today’s trading session but the rally may not last for long as higher interest rates coming from the US may hamper any further growth.
The European currency was enjoying a smooth ride above the 1.09 mark before crashing down to earth after last Friday’s strong jobs figures from the US which caught the market off guard and now predictions are the Fed will lift rates above 5 percent which was off the cards just a week ago.
Fed officials have been preparing the market for a March interest rate increase and estimates and forecasts for how high interest rates might ultimately have to rise to bring inflation to its 2% target vary widely. A 25-basis point hike is guaranteed next month but now a 50 point hike may be back in play.
"This reflects tightness in the labour as well as scope for further supply shocks. We have been expecting the USD to find some traction into the middle of the year as the market adjusts to a ‘higher for longer’ Fed view," says Jane Foley, head of FX strategy at Rabobank.
"While we have been maintaining a 1 month forecast at EUR/USD1.09, we expect a move to EUR/USD 1.06 in 3 months," she adds.
Looking further ahead today, the main drivers of the EUR/USD currency pair will be the release consumer price index figures from Germany which are expected to hit the market at 1.4 percent, well up on last month’s figure of -1.2 percent. If analysts are correct this may help to contain the Euro’s current slide.
Later on during the American session market participants will await the latest initial jobless claims figures from the US and should the news be positive, it will be added confirmation of a robust jobs market in the world’s largest economy and the Euro is likely to come under pressure again.