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Euro Continues to Rebound; Momentum Turns Positive
The EUR/USD has edged into the high 1.07s, and price action has been relatively mild compared to the fireworks seen on Wednesday evening and Thursday. While the sharp post-FOMC spike and subsequent rebound looks like an aberration, higher highs have been seen over the last four trading days, affirming that there has been an abatement in downside momentum after the pronounced declines see over the first couple of weeks of March.
Unfortunately for Euro bulls, the ECB is at the beginning of their quantitative easing program which should push the yield differential in favor of the greenback. The 10-year differential is printing a reading of 176, which is the highest it’s been in the past few years. Inflation in the Euro zone remains weak despite the slight pickup in Germany.
German producer price inflation rose to -2.1% year over year in February, from -2.2% year over year in January and with prices up 0.1% month over month. The uptick was mainly due to a rise in energy prices, which picked up 0.7% m/m and PPI excluding energy rose to 0.0% year over year from -0.1% year over year in January. The drop in the EUR is pushing up the nominal import bill and this will gradually push headline rates back into positive territory, highlighting that there is no real risk of a deflationary spiral, especially not in Germany, where the economy is set to expand stronger than initially expected this year.
The Eurozone posted a current account surplus of 29.4 billion Euros in January, up from 22.5 billion in December. The goods and services surpluses remained broadly stable and the main boost came from a jump in the primary income surplus. The unadjusted financial account meanwhile showed direct and portfolio investment outflows of 24.8 billion with portfolio investment outflows amounting to 29.8 billion, mainly in the form of equity, but also short term debt.
The EUR/USD has recaptured support near the 10-day moving average near 1.660. Momentum has turned higher with the MACD (moving average convergence divergence) index generating a buy signal. The RSI has moved higher with price action reflecting accelerating positive momentum, and is now printing a reading of 39, which is in the middle of the neutral range.
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