On April 7, European Central Bank president Jean-Claude Trichet will almost certainly announce a 0.25 percent interest rate hike.
He indicated it at the last monetary policy rate meeting and reaffirmed it in subsequent speeches. Because of this expectation, the euro has mounted a tremendous rally in the last month. Against the dollar, for example, it gained over 3 percent.
However, after April 7, the best short-term play is probably to short the euro. Below are three reasons.
1. The recent rally has already priced in the rate hike. It’s a “buy the rumor (or expectation), sell the news” type of situation.
2. Trichet may disappoint. Not that he’ll fail to raise the interest rate, but the fear is that he’ll not set the expectation for a series of further rate hikes. Indeed, the euro’s recent rally has priced in not only April 7’s rate hike, but also several ones after that.
3. The European peripheral debt crisis has not gone away during this period. It’s been pushed to the background by interest rate expectations, but after April 7, it’s “questionable whether the dichotomy between widening peripheral bond spreads and the EUR can continue,” stated a Credit Agricole report. Moreover, raising interest rates would actually exacerbate peripheral problems by driving up the already-high sovereign borrowing rate of certain peripheral countries.
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