Odds the Euro Reaches $1.60

The euro is struggling to extend its advancing streak to the eleventh session. However, the main driver, of divergent monetary policy stances remains intact. In fact, news today that 3-month Euribor is at 2-year highs and 3-month Libor was fixed at its lowest level since March 2010, illustrates this force.

The word signals by Trichet on Thursday will help guide the market toward fine tuning of expectations for the next ECB hike. The market leans heavily toward July, but this could change depending on Trichet's comments. For example, mentioning "strong vigilance" would encourage the market to look for a June hike. Or if Trichet does not say "interest rates are appropriate" a June hike would seem more likely.

Around the time the Fed gets through with its $600 bln of Treasury purchases, but continues to maintain its balance sheet size by recycling MBS proceeds, the ECB will also likely consider ending its 3-month unlimited fund facility.

Most recently we have identified the $1.50-$1.51 area as the next target for the euro. Beyond there, potential exists toward $1.55. Back in 2008 the euro reached a record high of about $1.6040. What is the risk that the euro tests its old high. Few are expecting it judging from public forecasts. Using indicative spot and volatility levels, the market pricing suggests a 9% chance that it seen before the end of June, a 30% chance it is seen by the end of Sept and a little more than 40% chance it is seen by the end of the year.