Does Euro Have What It Takes To Reach 1.50?

 |  Includes: FXE, UDN, UUP
by: Kathy Lien

EUR/USD - Gunning for 1.50?

Let's start by saying that 1.50 is an ambitious target and only the reason why we used such a catchy title is because when we have such strong moves in currencies or any asset class for that matter, investors start focusing on those "big round numbers" and 1.50 EUR/USD is one of them. There's a long way to go from here to 1.50 and I don't think that the EUR/USD has what it takes to get there. In order for EUR/USD to rise to 1.50 like it did back in 2011, we need the Federal Reserve and the ECB to be running significantly divergent monetary policies. Between January and of April 2011, the EUR/USD was on a tear, rallying from a low of 1.2860 to a high just shy of 1.50 at 1.4940. During that time the ECB raised interest rates as the Federal Reserve was in the process of implementing QE2. Obviously that is not where we are at right now and while we believe that the EUR/USD could have more room to rise, 1.35 is a far more realistic target than 1.50.

There is very little on the economic calendar next week that will alter the outlook for the U.S. dollar. When it comes to the FX market, sentiment is often times the number one driver of trends. Currency traders like what the Federal Reserve has done and skeptics have to respect that because we cannot underestimate the psychological impact of the word "unlimited." While the ECB and the Federal Reserve can't have a program that goes on forever, their promise to keep buying for as long as it takes sends a strong message to the market that they are in it to win it. They have no fear of throwing as much money for as long as it takes to stabilize and jump start their economies. For the Federal Reserve in particular, the focus is on the labor market. Will QE3 be enough? If politicians keep acting like children and don't grow up, putting their differences aside to take care of the fiscal issues, the flood of cheap money and low interest rates won't be enough.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.