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Euro May See Correlation with Risk Return as Greece’s Troubles Fade

Euro May See Correlation with Risk Return as Greece’s Troubles Fade

2010-03-29 17:35:00
John Rivera, Currency Analyst
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EUR/USD

The Euro has built upon Friday’s gains as Euro-Zone members agreed to a plan to help aide troubled Greece. The relief rally has started to lose steam despite positive equity markets. The EUR/USD has started to see its correlation with risk diminish as the credit issues n the region had become the main driver. Influence has faded from 43% a month ago to 36% as the pair has started to diverge from equity markets. ECB and FED interest rate expectations have remained anchored which has lessened their impact in direction. If markets start to look past the troubles in the region then we could see risks trends dominate future price action.

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ECB Interest Rate Expectations

ECB interest rate expectations have spiked higher following the accord reach by European leaders to help Greece. The ECB will be hard pressed to raise rates if members are struggling to secure financing to fill gaps in their budgets. Nevertheless, the region’s recovery continues to show signs of continuing and if inflation begins to accelerate the central bank may be forced to adhere to their sole mandate of price stability and begin tightening. Upcoming German employment data could impact the outlook for yields as a strengthening labor market in the Euro-Zone’s largest economy will put policy makers on alert as wage inflation is the biggest concern. Discuss this and trading ideas join the EUR/USD forum.

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FOMC Interest Rate Expectations

Early forecasts that the U.S. economy added 182,000 in February have failed to help raise the outlook for interest rates as the Fed is expected to remain on hold as long as unemployment remains elevated. Fed funds futures are pricing in a 13.1% chance of a rate hike in June which at the end of last year was the decision that markets were targeting for tightening to begin. Greater than expected job growth may help raise the outlook as many are attributing many of the new hires to the census.

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Risk

Stocks extended their gains today as the government’s personal spending report showed a gain for the fifth straight month. The positive consumption today combined with the relief generated from the solution for Greece and the forecast that the economy added jobs in February has raised the outlook for growth. A rising trend line has offer support when needed, but the steady gains give the indication that further upside potential exists. Therefore, if the EUR/USD’s relationship with risk holds then the pair may look to recoup its recent losses. Discuss this and other fundamental data in the Economics Forum.

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

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