Euro Reverses Slide After Hitting Fresh 11-year Lows

The EUR/USD initially extended Friday’s post-U.S. jobs report losses in Asia, logging a new 11-year-plus low of 1.0823, but has since turned around as a corrective tone in the greenback takes hold. The robust employment report has boosted the dollar’s yield advantage, which has pushed out the interest rate differential on the 10-year yield to 185 basis points between the US treasury and the German bund.

The ECB started its quantitative easing program, with the Bundesbank confirming that it has been active in the market. With purchases from the ECB, German bonds will have to make up the lion share of total QE and as German 2-year bond yields are already below the deposit rate, which sets the lower limit for QE purchases there may be increased focus on index linked papers, which don’t come with a lower limit for yields.

German trade surplus narrowed in January. Germany posted a seasonally adjusted trade surplus of 19.7 billion Euros in January, down from 21.6 billion Euros in December 2014. The drop was mainly due to a sharp decline in exports, which fell 2.1% month over month and more than outweighed the impact of a modest 0.3% month over month in imports. Unadjusted data shows that the three months trend continues to decline, despite the drop in oil prices, which suppressed nominal imports. The German economy is taking equal strength from net exports and consumption trends and is more broadly balanced than in previous recovery cycles.

The technicals shows that the EUR/USD currency pair is overextended reflecting an RSI (relative strength reading) or 26, which his below the oversold trigger level of 30 and could foreshadow a correction. Resistance is seen near the 10-day moving average at 1.1130. Target support is the August 2003 lows at 1.07. Momentum remains negative with the MACD (moving average convergence divergence) index printing in the red with a downward sloping trajectory.

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