Most currency advisors would have informed their clientele to sell the EUR last week as the European Central Bank (ECB) reduced its short term interest rates to 2.0%. This revaluation of the 16-nation currency was expected to drive its value to weekly lows, yet the results were almost stunning. The EUR made small rebounds across the boards throughout Friday afternoon and into the end of last week's trading sessions. The EUR has moved from the 1.3200 level against the USD last Thursday up to the 1.3340 level this morning, a significant reversal given recent Euro-Zone data.
While historically a factor which depreciates a currency, the interest rate cut was a actually a decision more intently focused on the strengthening of the Euro-Zone's broader economy. Therefore, while the EUR should have weakened, the policy adjustment made by the ECB actually bolstered consumer spending and helped strengthen the regional economy, at least in theory. Consumer confidence appeared to have risen shortly after the announcement of the rate cut, and sell positions on the various European currencies began to get unwound in exchange for greater risk. European consumers appeared to have bought back into local currencies to fund their increased spending.
With a light news week expected from the Euro-Zone, the 16-nation currency may indeed experience a similar trading week as that of the USD. Low volume trading mixed with few economic indicators may actually signify that this primary currency will not be in the driver's seat this week. As the forex markets become less predictable, traders should increase their knowledge and awareness of any major events. Interest rate cuts and manufacturing output have the heaviest weight on the European currencies, whereas housing and unemployment data drive the American markets. Knowing the difference is what separates long-term, successful traders from temporary ones.