The pair has close the week @ 1.3754, trading from a low of 1.3526 to a high of 1.3838. the main driver of last week were based on two main factors: the possibility the ECB will hike the interest rate sooner than the FED and the Libyan unrest which is pushing energy prices higher and is causing some risk into the market.
For what concern the possibility for the ECB to hike the interest rate sooner than the FED to fight inflation I would also consider that the US has a higher grow than Europe and has also higher inflation, which in currency is a perfect substitute of the interest rate.
The Libyan unrest is a more complicated factor. First it looks like that higher oil price makes the dollar bearish as US is a net importer of oil...but the Libyan unrest is should weight more on the Brent than wti, so should have no big impact on the dollar from this perspective and should weigh heavily on the euro; From another perspective it looks like the dollar have lost the status of risk aversion currency...I am not sure on this, I just think during last week there was some confusion in the market.
If the Libyan unrest will continue or will be considered to continue for at least next two three weeks, it will make a return to normality really long and this will be bullish for the dollar and at the same time bearish for the euro.
If the Libyan unrest will end soon and Qaddafi will loose things will still be more bullish for the dollar than the euro, but we need to understand what will happened.
If the Libyan unrest will end soon with Qaddafi victory than the dollar will make a big move against the euro.
I believe in all three Libyan scenario the dollar will perform better than the euro, for the simple equation that the Brent will get more expensive than the wti and so European economy will be impacted more than the US one.
for what concern the possibility the the Saudi Arabia may produce more output to replace Libyan disruption, well Saudi oil is different from Libyan one and I am not sure it's a good replacement for all the refineries that were being supplied from Libya.
I think the best indicator for the EuroUsd next week will be the spread between us oil benchmark (wti) and European oil benchmark (Brent).
Next Thursday there will be the ECB press conference...will be really important to follow what Trichet will say. If will look clear an imminent interest rate hike, well than the usd will go to test 1.4000 without doubt. Up to Thursday the Libyan and it's consequence on grow and energy prices will have the main role in driving the pair.
Happy trading.
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