In terms of the Euro, there are three reasons why we think the currency will continue to rise. First, economic data remains very strong with the German trade balance hitting a 6 month of high in September. Growth in exports to emerging markets like China and Russia are picking up the slack for softer demand from the US.
Second, the ECB remains hawkish. Even though they left interest rates unchanged at 4 percent today, unlike Bernanke, ECB President Trichet is still more worried about inflation than growth. The ECB wants to wait for more information before deciding what to do next with interest rates, so don’t expect a move in December. For the time being, they are still leaving the door open to raise interest rates in the first quarter of next year. In regards to the Euro, Trichet did not mention the currency at all in his introductory statement. Only in the question and answer session was he forced to address dollar weakness and euro strength. Trichet did his best to dance around the question about exchange rates, repeating his stance that disorderly movements are undesirable and the strong dollar is in the interest of the US. It is not a coincidence then that Trichet avoided talking about the Euro because inflation is still a big problem and they need a strong currency to offset inflationary pressures. The third reason why the Euro will continue to rise and the dollar will continue to fall is because our latest FXCM SSI index is giving a strong signal to buy the EUR/USD for a test of 1.50