All’s well that ends well – Europe Interest rates and the US Job numbers

The European central bank is expected to raise interest rates this week in an effort to fight the rising inflation causing panic within governments. It is expected to be raised by 25 basis points, the first time the ECB has changed the rates since May 2009. In an attempt to curb the rocketing prices which has caused global inflation, the effects will be felt in different ways across different countries. Pressure on Portugal, Spain, Greece and Ireland as they struggle with liquidity issues may result in further complications in the regions financial systems. Spanish banks are exposed to Portugal’s banking system and liquidity problems in Portugal could inadvertently cause a credit run on the Spanish markets. This in itself would not cause the case for Portugal to accept a bailout, but it will make it harder not to.

An interest rate hike will most likely cause further strengthening of the euro against most other currencies. Whilst this is good for production that use overseas materials and suppliers, this will also will put pressure on exporters and those economies that gain a substantial percentage of their GDP through tourism from visitors outside the single currency zone. If however the perceived danger to the smaller weaker economies outweighs the benefits of fighting inflation, there could be a sell off the euro as confidence decreases in the regions stability.

The US had a surge in the dollar when the non farm payroll figures were disclosed and the unemployment rate fell to 8.8%. Whilst the most powerful economy in the world celebrated along with all of its trading partners that have generally relied on the US being the engine driving world economic growth, it did highlight just how far the recovery has to go as prior to 2008 the US unemployment rate was under 5%.

The EUR/ USD has once again reached a key resistant point at 1.4234 where the euro sold off heavily before. If however the buying pressure breaks through this key level then we could be seeing new highs gained against the dollar with an ultimate target of 1.4790. Further long targets to watch for are 1.4427 and 1.4680 where key buying and selling levels have taken place through 2009.

IF the EUR/ USD retreats then 1.4037, 1.3887 and 1.3725 are significant support levels from before.

Please see the attached chart below...