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Euro and Pound Rising on Interest Rate Differentials

April 25th, 2011 Posted in Daily Forex News, Euro-Zone Bookmark and Share

In a slow European trading session the dollar is once again its back foot and trading lower versus the majors. Today’s FX trading is quiet with light volatility as many institutional trading desks are operating on a skeleton staff over the long Easter weekend. US home sales are the lone data piece up this afternoon in the New York trading session.

Interest rate differentials appear to be the driving factor in the dollar’s demise. The spread between the 2-year German Bund and the 2-year US Treasury bond is trading at a difference of 110.6 bps in Germany’s favor today.

Despite the rumors, a Greek default has not taken place over the holiday and the market continues to put a fence around the countries at risk (Greece, Portugal, Ireland), while focusing on yield differentials in Europe and the US.

The US deficit is also taking center stage with last week’s announcement by S&P to put the US credit rating on a negative watch. A combination of rising European rates and a bloated US deficit should allow the EUR/USD to continue its bullish trend and test the 2009 high at 1.5140.

Continued euro gains would also benefit the pound given the strong correlation between the EUR/USD and GBP/USD (0.80 from January 1 to mid-April) The BOE is also expected to raise interest rates in the near term. The spread between the UK 2-year and the US is currently at 41 bps. The 2009 high at 1.7040 would be a likely target for the GBP/USD.

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