EUR/USD: Headed to 1.31?

There is a good chance that the EUR/USD could be headed to 1.31. In my Daily Currency focus on yesterday, I said that the currency pair is prime for a breakout. Now that it is happened, the prospect of a rate cut by the ECB coupled with the comments from the German Finance Minister yesterday could drive the EUR/USD lower. The market currently expects the ECB to bring interest rates down to 1 percent, which is pretty much the lowest that they will probably be willing to go. Once that happens, the question immediately becomes, What Next? Will the ECB embark on Quantitative Easing and if so how. We will address this topic next week.

Of the 51 economists surveyed by Bloomberg, all but 6 expect a 50bp rate cut. Of the 6, 4 expect only a quarter point cut and 2 expect no rate cut at all. I think the ECB will cut interest rates by 50bp but fail to hint about what comes next.

There are 5 reasons why the EUR/USD collapsed today which I talked about in detail in my feature on FX360.

1) Comments from German Finance Minister
2) ECB Expected to Cut Interest Rate
3) Global Reserve Currency Not a Topic at G20
4) Japanese Repatriation
5) U.S. Equity Futures Down

Kathy Lien

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