Three Weights on the Euro

Since the beginning of this week, the Euro has fallen more than 500 pips against the US dollar, its biggest weekly gain in 3 years. The prospect of a rate hike by the Federal Reserve in August and/or September as well as key event risks over the next 48 hours has currency traders rushing out of Euros.

This morning, headline US consumer prices grew by a more than expected 0.6 percent, driving the annualized pace of growth to 4.2 percent. Surprisingly enough, the rise in core prices has been relatively tepid which indicates that higher food and energy prices continue to be the primary contributors to inflationary pressures. Either way, the numbers validate the Fed’s need to be hawkish, has contributed to the dollar’s rally today and support the case for a rate hike before the end of the year.

Two other key event risks are also hanging over the Euro. According to the latest report on the Irish Lisbon Treaty, an overwhelmingly large number votes have been in favor of rejecting the Lisbon Referendum. This No vote, though unsurprising is adding pressure on the single currency even though in the grand scheme of things, it in no way threatens the viability of the Euro.

This weekend we have the G8 meeting of Finance Ministers. There have been back and forth reports by “G8 officials” on whether the group will talk tough on currencies, keeping alive the threat of intervention. If a comment is made, this time around, it won’t be about the Asian currencies and instead will be about the need to support the US dollar.