The Euro continues to decline, here’s why

The EUR/USD gave back
most of Friday’s gains in early European trade as expectations of a possible
rate hike from the ECB faded quickly.
Joaquin Almunia the EU Monetary
Affairs Commissioner talking about the Eurozone inflation conceded that the
region’s rate is likely to rise above the banks self imposed barrier of 2.0% to
2.5% in August. However, Mr. Alminia also noted that “if inflation expectations
do not rise rapidly then the ECB policy can be more gradual”, suggesting that
any potential rise in rates may be a long way off.

The euro has been the victim of an ever widening
interest rate differential to the dollar, a dynamic that has hurt the currency
over the past 6 months as the carry spread now stands at 175 basis points
against it. The ECB is trying to walk a very fine line between its mandate to
control the budding inflationary pressures in the Eurozone and its desire to
nurture the nascent economic recovery in the region where the unemployment rates
stands at nearly 10%.

In UK the housing prices appear to have
stabilized after Rightmove released its survey showing that prices rose 1.5% on
a year over year level. Housing continues to be key to the strength of the UK
economy as any rapid depreciation in values will likely have a catastrophic
effect on consumer spending. UK Retailers are already sending out gloomy signals
with high street sales at their weakest in two decades, according to one of the
industry’s most senior analysts. Verdict Research, headed by Richard Hyman,
forecasts that retail sales in value terms will rise by just 2.1% in the last
three months of 2005, compared with 3.3% growth a year earlier.

In addition to retail worries the pound came
under attack today after news that MPC hawk Andrew Large will be leaving in
January. According to IFR “Large voted for 25bp UK rate hikes on three separate
occasions earlier this year (March through May), being in the minority on each
occasion. He also voted against August’s 25bp cut.”


Boris Schlossberg serves as Senior Currency
Strategist with Forex Capital Markets in New York, the largest retail forex
market maker in the world. He is a monthly contributor to SFO Magazine with
articles focused on understanding proper risk management, trader psychology and
true market structure. He is also a featured expert at and a frequent
commentator for the Marketwatch From Dow Jones Currency and Bond Report