The EUR/USD continues to find support on the back of risk appetite which has pushed the pair to a fresh yearly high of 1.4970. It isn’t a coincidence that the Dow broke above 10,000 on the same day the pair was looking to test 1.5000. The two psychological levels are significant for both and a fundamental catalyst may be needed to see them overtaken.

EUR/USD

ECB Interest Rate Expectations

Interest rate expectations for the ECB over the next twelve months spiked higher today to 98.2 bps as European equity markets reached their highest levels in a year. Overnight index swaps still remain below the high of 101.5 set on October 9th as the ECB hasn’t shown any signs that they are considering tightening over the near-term. The central bank has maintained that there are still downside risks that must be considered and that currently overall risks are balanced making current interest rates appropriate. Indeed, today we saw that exports for the region plunged 5.8% in August which was the most in seven months. Flat consumer prices during September will also allow policy makers to maintain their accommodative stance.  Therefore, ECB interest rate expectations should continue to have little influence over price direction.

FOMC Interest Rate Expectations

Fed funds futures are currently pricing in a 4.1% chance of a rate hike by the end of the year which is where they have settled at for the past week. The FOMC minutes from last month’s policy meeting didn’t give any clear direction on future policy as member s appears to be divergent on the potential of the recovery. Many members still believe that the recovery could be weaker than expected which would make raising rates too soon very costly. However, there are some that are in the camp that if you wait too long then inflation risks could grow and higher prices will strangle future growth. Therefore, with such wide ranging viewpoints we may see the Fed.

Risk

Stocks have pulled back following the Dow’s break above 10,000 for the first time in over a year. Corporate earnings season has been relatively positive but the few misses have caused enough concern to lead traders to start booking profits. Next week we will see several consumer discretionary names report and with consumer consumption expected to remain weak more disappointment may be ahead. Therefore, we may see the equity markets look to test support levels which could be a weighing factor on the EUR/USD.

To discuss this report or be added to the email list contact John Rivera, Currency Analyst: jrivera@fxcm.com