Euro Consolidates as Yield Advantage Favors Greenback

EUR/USD has consolidated near 1.1130, above Friday’s post-U.S. jobs report low at 1.1049. An intraday high was left at 1.1178, which was seen after a report that the Obama administration thought dollar strength a problem. The White House denial saw the pair retreat. Further declines seem likely with Friday’s strong U.S. payrolls data having reopened the Fed tightening narrative, which is this time centering on the September FOMC as a possible lift-off date.

The dollar’s yield advantage has widened above 152 basis points at the 10-year T-note over Bund comparison, up from levels near 140 basis points that were seen last week. The 1.1000 level provides the next downside focal point, ahead of 1.0970, which is the current position of the 50-day moving average.

However volatility has returns as the Eurozone economy is improving and perky May inflation data have fed the market narrative that the ECB may have to taper QE at some point, even if policymakers keep reaffirming their commitment to full implementation of the program. The ongoing standoff between Greece and its creditors in bailout negotiations remains a thorn in the euro’s side, though the Greek electorate may well oblige the government to make concessions if recent polls are to be believed.

Germany posted a seasonally adjusted trade surplus of EUR 22.3 billion in April, after EUR 19.3 billion in the previous month. The improvement was due not only to a fresh acceleration in export growth to 1.9% month over month from 1.3% month over month in March, but also to a 1.3% month over month drop in seasonally adjusted imports.

Unadjusted data showed a trade surplus of EUR 22.1 billion, up from EUR 17.3 billion in April last year. The unadjusted current account surplus posted a surplus of EUR 19.6 billion, versus EUR 16.9 billion a year ago and the current account surplus widened to EUR 79.4 billion in the first four months of the year from EUR 66.4 billion in the corresponding period 2014. This will keep pressure on Germany to address its current account surplus alive, even if the recovery is mainly driven by consumption and domestic demand.

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