Will the Euro Eventually Suffer from the Rate Hike?

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The Euro bulls ride on the upcoming rate hike in the Euro-zone. Higher interest rate means a stronger currency. But wait! the talks about a rate hike are already hurting Europe’s core, even before this happened. And there are more reasons for Euro weakness.

In the past few months, the ECB raised its voice against inflation. ECB president and other senior officials warned against inflation in many occasions, and hint that they are ready to act and raise the rates. This talk peaked in the recent rate decision, when Trichet not only used the code words “strong vigilance” (meaning a rate hike in the next decision) but also explicitly explained the meaning and said out loud that a rate hike is likely in April’s meeting.

Trichet has a huge influence over EUR/USD. His words pushed the common currency higher. A higher interest rate draws more money – it makes a stronger currency. But why raise the rates? Since inflation is on the rise, even if this inflation is imported – oil and other commodity prices. This inflation isn’t in the core products and isn’t driven by demand. The economies aren’t really doing well.

Some economies are also suffering from heavy debt. Their austerity measures are already weighing on the economies. Inflation is a non-issue. A higher interest rate means a higher hurdle for economic growth in Greece, Ireland, Portugal and Spain. The hopes of recovery are diminished with a higher interest rate.

Rate Hike Hurting the Core

But it’s not only these troubled countries. The consequences of a premature rate hike is already felt in Germany – the all-important ZEW Economic Sentiment unexpectedly dropped from 15.7 to 14.1 points, instead of rising above 16 points. Also the figure for the whole of Europe disappointed. So, also Europe’s powerhouse is endangered.

Trichet won’t be cooling a hot, growing and inflationary Euro-zone. He’ll be freezing a Euro-zone that is still struggling to defrost.

EUR/USD cannot settle above 1.40 and cannot break above 1.4030. This is already a sign for the bulls. Will we see a fall?

And, let’s not forget about the debt crisis.

Further reading: Portugal is running out of time.

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About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

8 Comments

  1. Its all about price on

    You know, your absolutley right. But…the market doesn’t care. As long as the price keeps going up, stops will be hit, margins will be called and the trend will continue. I think we have to accept that the EU is being managed better than the US, and dip is just another pull back. The US$$ will rise, but not today or the rest of this week.

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  3. I can truely identify with your observations.
    Lets wait till nest week and see.

  4. A timely reminder of what we have been saying for 2 months. A euro rate rise will not affect inflation but cause huge additional pressure on the PIIGS. Therefore rational people wouldn’t dream of it now. Eurocrats might, and if they do, the Euro will be in crisis and speculators will be in gravy. Yes please, i wait for the ECB to mess it all up with a disasterous rate rise.

  5. I have the same thoughts since more than 2 weeks. By my opinion Euro is a ticking bomb and when it explodes the disaster on the market will be similar do May 5th 2010 (I hope everyone remember that day – it was like the hell is coming to us very fast). But this may take 2-3 months.

    In term: You are completely right – 1.40-1.44 seems like quite a resistance and the 4th unsuccessful attempt just showed us one more time that the bull are off their powers already. It’s time for bears to get outside and eat the bulls.

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