Forex Investment and Currency Trading

Short Term (3-6 months): OVERWEIGHT
The near-term outlook is likely to see the Euro range-bound against the US-dollar not far from the historic highs for the single currency posted in late-April (around 1.60). The US Federal Reserve has signalled an increased concern at US dollar weakness, highlighting its role in lifting US inflationary expectations. This theme may also be reflected in stronger G7 warnings on the undesirability of new USD weakness. Against this backdrop, market does not expect the dollar’s trade-weighted value to make new 2008 lows. Whilst the ECB looks set to lift its key refi rate, developments in Euro-zone cyclical indicators will act as a restraint on new gains for the Euro. Business and consumer confidence readings look set to weaken further in coming quarters, gradually building the case for eventual monetary policy ease next year.
Medium Term (6+ months): UNDERWEIGHT
The shift in ECB policy focus from fighting inflation to supporting growth outturns is likely to be forthcoming in Q1 2009. In the context of a 25bp rate cut in that quarter and a total of 50bps in ease the following quarter, it seems likely that the Euro will surrender ground on a broad range of crosses. However, the set-back will be modest and still leave the Euro’s trade-weighted value elevated by post start-1999 standards. Not all of the factors driving Euro weakness will be found in the Euro-zone area itself. In the United States, growth may be gradually accelerating back toward trend whilst the Bank of Japan may finally embark on a new phase of policy tightening.  Mid-2009 forecast for EUR-USD lies at 1.45, with EUR-JPY retreating to 159.50.