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Inflation and the EUR, the USD will further decline – ‘buy’ signal on the EUR.

Posted by Adrian on June 26, 2008

It is no surprise that the Federal Reserve under Chairman Ben Bernanke decided to leave rates on hold as of their recent meeting), after drastic cuts have left the US cash rate at 2.00%. The main criticism of Ben Bernanke is he is a money printer; with global inflation edging up in the last two years. It all but seems realistic to make the assumption the Fed, under the auspiciousnesses of Ben Bernanke, have helped caused an inflation disaster by degrading the US dollar and do not seem the least bit interested in tightening monetary policy.

I posted in morbius glass in 2007 about the potential for the USD to be de-pegged from certain currencies, namely the Saudi Arabian Riyal (SAR). So I think we are going to see the US dollar peg disappear very soon, opting for the stronger EUR. We may see a huge decline on the USD in the next quarter; with the Fed clearly losing control of inflation in the US.

It’s essentially an economic disaster in the making.

So it is clear that American crumbling economic landscape is most certainly going to effect the global economies, as it already has with the credit crunch that was brought on by the subprime mortgage market collapsing. Now inflation is going to rapidly effect global economic conditions. Europe with a cash rate that remains at 4.00% is in a bind, already there are dissenting aspects with in the EU union, France, Italy and other economies that feel marginalized by the stronger European countries . Although, with inflation very much destroying consumer confidence right across Europe, most economies within the greater EU are now on par with economic pain and dire forecasts for growth and productivity.

Of course the US decision not to lift rates, in such a stagflation environment, sends out a subtle signal for other central banks to follow suit. The question is, will the European Central Bank leave rates on hold as they have done since their last meeting on March 8th 2008? Or will they increase rates to combat inflation?

But as mentioned the looming US currency disaster, mixed with inflation or stagflation, high oil, high food, bank failures and declining asset values (namely property) – is the beginning of a huge economic crunch in America. Europe may try and attempt to escape this, or at least try and tackle inflation; accept their downturn – and hope that it may not be as painful as the downturn in the US is going to be.

The ECB must be shitting bricks with the US Fed decision, it ultimately puts pressure on the ECB governor Jean Claude Trichet to make a move; and it appears the move will be up for rates. Possibly despite France and Italy, Spain making a fuss, thus putting extra strain on a already shacky EU Union. Still with the Federal Reserve in the US in a world (narrow) of their own, driving blind with such blatant denial of the US economy; the EU like I said, will have no choice but to break away from the trend of low interest rates and holding rates, in which that ‘trend’ has contributed to inflation (scarce commodities) and has we are all aware – is outta control.

The EUR has been a star performer against the US dollar throughout 2008 (refer to graph 1983 to 2008). you can see the incline started from 2003 upward against the USD.

Please click on graph for larger image

The EUR will be in greater demand when the ECB increase rates, on a one day grap of the EUR/USD we can see the resistance at 1.5820 and support set at 1.5284 – the EUR is now just climbing above the 50 day average. It is settling in a trading range between 1.55 and 1.60. A break out of the resistance of 1.58 is possible within the next 3 days after this post (option for June 30th for 160). So the EUR is buy.

Please click on graph for larger image

*please note morbius glass does not give investment advice. The following information is for reference only. Trade at your own risk.

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One Response to “Inflation and the EUR, the USD will further decline – ‘buy’ signal on the EUR.”

  1. […] do; on the escalating inflation in both the European Union and Asia. As I mentioned in my blog post ‘Inflation and the EUR, the USD will further decline – ‘buy’ signal on the EUR’ – Europe has been put in a precarious position with interest rates and inflation, the ECB may have […]

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