Euro at New Record - 1.50 or Bust?

Talking Points

•    Japanese Yen: Rebounds above 110 after Nikkei turns

•    Pound: Retakes 2.0600 as anti-dollar flows sweep offers

•    Euro: Takes out record highs on rumors of Fed cut and hot PPI

•    US Dollar: More Housing and Fed minutes on tap

After a dropping for most of the Asian session, EURUSD staged a vicious one-way rally that took the pair to record highs by early European trade. Aided by positive equity markets and hotter than expected PPI data, the EURUSD verticalized for nearly 100 points squeezing out any wayward shorts on its way to new highs at 1.4780.

The story in the pair continues to focus on interest rate differentials. Today’s PPI data which printed hotter than expected at 1.7% vs. 1.6%, demonstrates that price pressures, caused by higher energy prices continue to  exert a hawkish bias on the ECB. Meanwhile rumors of a surprise Fed intra-meeting cut swirled through the currency market triggering new waves of dollar selling.

At this point the pair appears to be on an unstoppable path towards the 1.5000 level as a host of issues, from the continued fallout of the sub-prime fiasco to the possibility of further rate cuts from the Fed to the troubling outflow of foreign capital out of the US have turned the greenback into persona non grata of the currency world.     Still. should some of these dollar bearish predictions prove false 1.500 may well mark an intermediate term top for the pair rather than the start of another leg down.

One key factor that the market will be watching is the attitude of the Fed. Today’s release of the Fed minutes may provide a clue as to whether the US monetary policy makers are leaning towards yet another rate cut before the year end. Given the recent slew of relatively hawkish Fed rhetoric we believe that the chances of Fed remaining stationary are actually quite good, but given the markets ultra bearish posture, even a halt in easing may not be enough to prevent a run at the 1.5000 figure.

Finally, UK data continues to show further deterioration as UK public finances recorded their weakest surplus since 2005. The pound did not weaken much, benefiting from anti-dollar sentiment, but remains vulnerable against both the euro and the franc as the possibility of BoE rate cuts becomes stronger by the day.