Forex Traders Banking on Trichet, French Bailout?

The EUR/USD pair traded higher on Tuesday, approaching $1.440 at one point. Perhaps surprising was the pair's ability to trade higher despite an ultimatum by the European Union. According to Dow Jones, European Union officials threatened to force Greece into a default if Greek legislators did not pass the series of austerity measures up for vote this week. Other news may have had a more potent effect on investors' minds. On Monday night, Forbes reported that French President Nicolas Sarkozy announced plans for a debt rollover agreement. That agreement among French Banks could provide the framework for an international plan. Additionally, Jean-Claude Trichet—President of the European Central Bank—stated that European Central Bankers were in “strong vigilance mode.” This phrase may have been taken by the markets to signal a forthcoming interest rate hike, as Trichet has used the phrase before hiking interest rates in the past. Inflation in the Euro Zone has exceeded the ECB's 2% limit since December, according to Bloomberg. Recent inflation may have been caused by the ECB's exceptionally low interest rates in the wake of the 2008 financial crisis. The ECB has thus far raised the interest rate only once in the past three years. Action Items Bullish: Traders who believe that the euro will rally further after Trichet raises rates might want to consider the following trades:

• Buy WisdomTree Dreyfus Euro ETF EU in a long play on the euro currency. If the euro rallies, EU may do well.
• Short WisdomTree Dreyfus Currency Income ETF CEW in an anti-emerging market currency play. CEW has some emerging market exposure. When questions have arisen regarding Greece, investors have bailed out of emerging markets in the past, and they may do so again in the future.

Bearish: Traders who believe that the EUR/USD pair will decline on Greek fears may consider taking positions in the following:

• ProShares UltraShort Euro EUO is a pure short play on the euro currency. EUO is leveraged, however, so investors should be cautious before taking a position.
• PowerShares DB US Dollar Index UUP is a long play on the U.S. dollar. When cracks have surfaced in the euro situation, the dollar has rallied in the past. If the euro weakens from here, the U.S. dollar and UUP may benefit.

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