The key will be who raises first... but remember, Euro rates are still higher than US rates and my view is that even if the US hikes first, Europe would be quick to catch up and be more aggressive. This is assuming that US hikes atall.
Right now, market has priced in a 91% hike for Sept. 2010, this is up from 84% last week. This clearly can be seen by Euro price action last week.
Given the upmove in long end interest rates (The 5yrs and the 10 yr yeilds have moved much higher than the 1yr and the 2 yr), people are expecting either higher inflation or higher growth. However, what happens if neither happens? Back in history, Japan had a very very similar story, and there was a time when their yeild curve was similar to the current US yield curve (in terms of expectations). But then, neither did they have growth nor did they have inflation.
However, all this is just positioning. Customer and Soverign flows have been drying up on account of year end. Starting Jan flows will start playing a bigger role in price discovery....
Right now, market has priced in a 91% hike for Sept. 2010, this is up from 84% last week. This clearly can be seen by Euro price action last week.
Given the upmove in long end interest rates (The 5yrs and the 10 yr yeilds have moved much higher than the 1yr and the 2 yr), people are expecting either higher inflation or higher growth. However, what happens if neither happens? Back in history, Japan had a very very similar story, and there was a time when their yeild curve was similar to the current US yield curve (in terms of expectations). But then, neither did they have growth nor did they have inflation.
However, all this is just positioning. Customer and Soverign flows have been drying up on account of year end. Starting Jan flows will start playing a bigger role in price discovery....
DislikedThat are good questions! Specially the last two ones...
I remember that was an issue as well in many other forums...
Yes - true - that may be one of the reasons - why market wants to drive that pair down since beginning of december - because not only a few are believing that there might be a change in that rate issues sooner than many american forex participitiants are expecting...
Anyway - it looks to me still as if a bit toppish at this area...Ignored