EUR/USD Breaks 1.4000 - More Downside in Short Term

Monday, 1 November 2010

The EUR/USD has broken through the 1.4000 barrier for the first time in a few weeks today - in a move which signals possibly the beginning of a major trend for the currency pair. Many investors have been sitting long the EUR/USD, and as such - have celebrated a number of large profits on the currency.

However - it is now time to change the official outlook on the currency pair. In our opinion, the USD is going to come under a bit of buying pressure in the next few weeks - and the Euro, the obvious main trading currency with the USD, will therefore have to fall to accommodate the new trend.

This seems to have already begun - with many investors quickly switching sides in the last few weeks. We found that those who we spoke to were confident that the currency pair would be trading at around the 1.3500 or so before the end of the month (November) and we would tend to agree with this outlook.

However, that direction could be up for discussion in the coming days - especially when Friday comes around. This is the day when the long awaited information is released from the Fed regarding further monetary loosening - or as everyone has been referring to it - quantitative easing 2. Investors have flipped and flopped many times in the last few weeks after hearing various arguments for and against the further easing - and therefore the current state that many people are in is that they are simply waiting for the announcement to be made.

Whilst the majority of economists polled are expecting further quantitative easing measures to be in place by the end of November, it is ultimately the level of these measures which matter the most. If, for example, the Fed comes out with a $200 billion stimulus package, many would look at this as being on the tight side. Alternatively, to get in front of the "curve for quantitative easing" - the Fed would have to offer $1 trillion to assist the markets.

This number seems ever more unlikely as the days go on - especially with growing rhetoric out of Washington and the Fed itself against further large quantitative easing measures.

As far as an effect on the currency markets goes - a large quantitative easing package would have a negative effect on the currency - as the amount of money cycling through the economy would be diluted - which would therefore dilute the currency as well.

Alternatively, a smaller package would dash expectations on the curve, and therefore result in a stronger US Dollar in the medium term.