The sharp moves in the Euro versus the US dollar have been the result of expectations that, in the near-term, the Fed will hike rates and the ECB will cut. However, there are indications that these shifts in interest rates won’t even occur until 2009, and once this becomes clear to the markets, EUR/USD could see a turn higher.

US Fed: Cautious on Growth Prospects, Focused On Inflation, Much of the US dollar’s gains since mid-July have come as the result of market expectations that the Federal Reserve will raise rates in an effort to fight inflation. Indeed, many of the Federal Open Market Committee members remain openly hawkish, but growth is still a clear concern as well. Furthermore, with the US government’s seizure of Fannie Mae and Freddie Mac, it is obvious that the credit crunch is worrying to everyone. Nevertheless, the US Treasury was really the one to lead the charge in the GSE (Government Sponsored Enterprise) intervention, suggesting that the Federal Reserve will not make any other efforts to address liquidity issues beyond their existing lending facilities. Indeed, the future direction of the fed funds rate will likely be a hike, but given the downside risks to economic growth, don’t expect such a move until 2009.

source: dailyfx.com