EUR USD (1.3110) The intellectual debate on the Fed’s new inflation target began in earnest yesterday, led by Paul Krugman who insisted that two percent was too low. For inflating away debts quickly, this is certainly the case. However, what the market is concerned with is that this ‘low’ target will hasten the day the Fed starts to hike, i.e. the hawks at the Fed might soon have the arguments for cutting short the promise of low rates until the end of 2014 and provoke a dollar rally. We are more relaxed on this point because of the unemployment mandate. The high level of joblessness will allow the Fed to tolerate a higher inflation rate. Even if unemployment were to suddenly fall, Bernanke could still argue with the ‘policy relevant time horizon’; it is not today’s unemployment that matters, it is tomorrow’s.
The Fed has not been the only reason why traders have been hesitant to buy euros – the single-currency has, at least, started soft in Europe every day this week – the eurozone debt situation remains a worry. Greece, and increasingly Portugal, has been in the headlines. The reignition of popular euro-scepticism in 2012 was caused by S&P. However, since the downgrade blitz, the euro has only risen. So many of those who now focus on the Greek PSI negotiations and on the width of Portuguese bond spreads are already short at lower levels. So we remain bullish for a target at 1.3285. Good support stands at 1.3030, but the risk-limit of our bullish view remains at 1.2920.
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Deutsche Bank