Fed, ECB Rate Talk Prompt Euro Dollar Yo-Yo

The possibility of rate hikes from the European Central Bank and cuts by the Federal Reserve sparked a battle between the euro and U.S. dollar last week. First the dollar appeared to have the upper hand, but the single currency gained Tuesday and Wednesday after minutes from a Fed meeting were published, suggesting it might start turning around its rate rising program. The euro ended Tuesday at USD1.1738 compared to USD1.1706 Monday, and it reached USD1.1840 during trading Tuesday. One-week implied volatility was up slightly Tuesday at 8.67%, compared with 8.36% Monday.

In the options market, most players were buying euro upside, said traders, buying one-week call options with strikes at USD1.17 and USD1.18. But several dealers noted the euro's rise could be halted by established barriers above USD1.18 which could prove hard to shift. When the pair has reached USD1.18 during trading it has not found much support and dropped down afterward. The U.S. holiday could be an opportunity to take out these barriers, noted one, as there will be less support for the greenback.

Tony Norfield, fx strategist at ABN AMRO in London, said every day this week there has been a new interest rate story from both Europe and the U.S. But he noted there are strong upside resistance levels for the euro against the dollar and the barrier at USD1.1875 could be a tough one to break. The yen is more likely to be the currency which sees a sharp rise against the dollar over the holiday. Lower levels of implied volatility on dollar yen make it more attractive for end-of-year profit taking opportunities, he explained.