Daily Insight

This is an interesting snippet on interest rate differentials with regard to EURUSD. Note how most analysts' estimates are "sitting on the fence" at 1.1500 -1.2900.

Personally, I think the Euro rate outlook will strengthen as inlfation spreads across the Atlantic, and the US rate outlook will weaken as consumer and corporate spending begins to suffer, leading to a big Euro rally during 2006.

EURO-DOLLAR: As background, the last time the US had a 2.0% interest rate advantage over the eurozone was in 1999, just after the euro's inception. From April 1999 (ECB cut to 2.5% from 3.0% with fed funds at 4.75%) until Oct 2000 (ECB raised to 4.75% from 4.50% vs fed funds at 6.50%) the dollar sported at least a 2.0% interest rate differential vs the euro. Over this period (April 99 - Oct 2000) the euro saw a rough range of $1.0910 (Oct 1999 high) to $0.8225 (Oct 2000 low). Looking forward to next year, futures are pricing in nearly three ECB hikes by the end of 2006 and an addition three Fed hikes before the "pause" comes. This will still keep a 2.0% interest rate differential in the dollar's favor, analysts remind. Despite this, the market leans toward euro bullishness. The Oct 31 FX Week has 33 analysts estimates for the euro 12 mos from now: 12 see a $1.30 or higher euro, 4 see a $1.1500 or
lower euro, and 17 are in a $1.15-$1.29 range