- During the trading session on Wednesday, we have seen quite a bit of volatility, as the CPI numbers came out of the United States cooler than anticipated.
- That being said, we are still overstretched in the EUR/USD pair, so it does make quite a bit of sense that we would see a bit of hesitation.
- However, this is also a market that has decidedly started to focus on the interest rate differential in the bond markets as they are starting to collapse.
Remember, the interest rate differential has favor the US dollar for quite some time, but we have seen interest rates in America drop a bit, while more importantly, we have seen the German bond yields skyrocket. After all, Germany is going to throw a lot of supply into the market, and it looks like traders are already telling them that they are going to pay more for it. This makes the euro give more swap that it once did, and as long as that’s going to be the case, you could see this market continue to rally.
Longer Term
That being said, I do think that this is going to be one of those years where the EUR/USD pair becomes very volatile, and I think that sooner or later, we will probably see a turnaround that is just as brutal as this one. So far, it’s worth noting that the interest rates jumping in Germany are helping things, but the question then becomes whether or not the turnaround in the German economy can be sustained with those higher rates?
I suspect what we are seeing is a massive short covering rally, as well as the interest rate play forming. However, if the US economy has a very short recession and inflation comes back quicker than anticipated, something that I am watching very closely with forward-looking indicators, you could see a lot of euro holders suddenly on the wrong side of this trade. Regardless, I’d be cautious about buying the euro all the way up in this area without some type of pullback.
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