Why the Euro Has Rallied

Hawkish comments from the European Central Bank last Thursday cemented the near term bottom in the Euro. Yesterday, the currency broke out of its month long trading range against the US dollar on the stronger than expected growth in German producer prices and the prediction by the President of the ZEW that the ECB could raise interest rates. Today, these hawkish comments were validated by the rise in German business confidence. Both the current and expectations component of the IFO report increased this month, which suggests that the strength of the Euro and the weakness in the global economy is not taking a significant a toll on German business activity. Whether this strength is more than just fluke remains to be seen as Friday’s PMI numbers will shed more light on the actual health of the Eurozone economy. Meanwhile the Swiss Franc also rallied across the board thanks to a drop in the unemployment rate and an improvement in analyst pessimism. During periods of carry trade liquidation, the Franc performs particularly well.