Investing.com – The euro rose to a nine-month high against Monday as more hawkish comments about European interest rates contrasted with the Fed’s less dovish market rates.
The euro reached $1.0903, breaching the recent top at $1.08875 and opening the way to a high from last April at $1.0936.
Why go up?
The rally was helped by comments from ECB Governing Council member Claes Nott, who said interest rates would rise by 50 basis points each in February and March and would continue to rise in the following months.
The remarks suggest that hawks among policy makers will struggle to raise rates, and the comment was seen as a reaction against recent reports that the European Central Bank will ease back to a quarter of a point from March.
According to a Reuters poll of analysts, they expected a 50 basis point increase in March and 3.25% eventually.
What about the federal?
In contrast, futures have ruled out almost any chance that the Fed will move 50 basis points next month and steadily lower potential peak rates to 4.75% to 5.0%, from 4.25% currently to 4.50%.
Investors also have about 50 basis points of interest rate cuts in the US for the second half of the year, reflecting less soft data on inflation, consumer spending and housing.
Rapid manufacturing surveys for January which are due this week are expected to show further improvement in Europe, in part due to lower energy costs compared to the US.
lost its position
“The US has lost its leadership position in global growth if the latest PMI surveys are to be believed,” said Ray Atrell, head of foreign exchange strategy at NAB.
“Meanwhile, gas prices have fallen by 60% since early December, sharply reducing the negative terms of trade shock that hit the eurozone,” Atrell said.-
“In addition, the inflation rate in the United States is expected to decline more and faster than the Fed forecast,” Ray Attrell added.--
What about next?
In this scenario, says NAB’s Head of FX Strategy, “the US dollar has much more room to fall this year.”
Ray Attrell, head of forex strategy at NAB, now expects the euro to reach $1.1000 by March and $1.1700 by the end of the year.
According to Atrell, the same argument applies to the pound, with markets betting that the BoE will hike half a point to 4.0% at next week’s policy meeting.
The pound rose to $1.2420 and is within striking distance of last week’s high of $1.2435.
And so the greenback was a shade weaker against a basket of currencies at 101,740 and just short of an eight-month low at 101,510.
And what about Yen?
The dollar at least managed to stabilize against the yen after the Bank of Japan (BOJ) defied market pressure to reverse its ultra-easy bond control policy.
Analysts assume the BoJ will stand its ground until at least its next policy meeting in March, though one hurdle will be the expected appointment of a new BoJ governor in February.
Any hint that the alternative is less pessimistic than incumbent Governor Haruhiko Kuroda could see the yen rally again, according to market analysts.
Currently, the dollar is hovering near 130 yen levels, after last week’s wild fluctuations between 127.22 and 131.58.
While the focus on interest rates will make the BoC meeting on Wednesday rather noticeable, as the markets are leaning towards another quarter point increase to 4.5%, but that would be the end of the tightening cycle there.
The Canadian currency was steady at $1.3374 per US dollar, after bouncing from $1.3497 on Friday when local retail sales data proved much weaker than expected.