What further with the dollar?

hello,

During the weekend summit of G-20, head of the European Central Bank, told reporters that the March meeting of the Bank may prove to be one of the more important this year.

He hinted that the ECB is not going to be passive, but to react even in situations where the potential risk of deflation may (but need not) materialize. He added that in March, the Bank will have adequate information to make a potential decision. Of course, this does not mean that the March 6 will cut interest rates, but the probability of such a movement has grown.

For now, investors seem to ignore the risk - yesterday we met a better reading of the German Ifo Index (increase in February to 111.3 pts.). The impact was also published by Eurostat, which showed that HICP inflation across the euro area was finally 0.8 percent. y/y in January, compared to 0.7 percent. y/y in the first reading. However, the inflation will start to come back on Thursday, when it will begin to flow from the morning preliminary estimates from Germany (first of the Länder), and on Friday we will get the data for the whole euro area.

Record gap, I note between the market interest rate and the pair EUR/USD looking at the long-term comparison. <chart 1> However, it has been realized that you need to put into practice the expectations of a rate cut by the ECB.

chart 1. EUR/USD & FRA rate, 2014-02-25

Both short-and long-term rate contracts show that the EUR/USD should be currently around 2 figures below.

chart 2. EUR/USD & short and long-term rates, 2014-02-25

At the moment, however, I recommend small positions. If the German inflation disappoint, you will have to invest more aggressively on the ECB's interest rate cut.

regards,

oscarjp

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