Euro Steady as US Yields Tumble

The Federal Reserve showed concerned about global trends in its latest policy statement and again issued a comment that it can be patient. The Fed is optimistic about the economy, as the job market continues to diminish, though price pressures have declined further below the 2% target due to energy price drops. The Fed made note of international developments for the first time as a factor in its policy calculus. This could mean that continued negative price pressures, especially in Europe could keep the Fed on the sideline for an extended period.

Today’s inflation news from Europe is exactly what the Fed is afraid of. Eurozone producer price inflation dropped to -2.7% year over year in December from -1.6% year over year in November. The drop was to a large extent due to lower energy prices, which declined -8.3% year over year after falling 4.9% year over year in November. This is also feeding through to the intermediate goods sector.

When discussing inflation the Fed said that inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation have declined substantially in recent months.

In additional to concerns over inflation, internal conflicts between the EU and Greece over budgetary items started to flair. Greek 10-year yields today are down sharply, amid signs that a compromise between Tsirpas and his Eurozone peers may be necessary. Tsirpas is quietly dropping his insistence on a debt cut and is proposing a modification of repayment terms, something which Eurozone officials always were willing to talk about.

The recent decline in US yields has kept the EUR/USD range bound, but stronger than expected jobs news on Wednesday, Thursday and Friday will re-ignite the trend. Momentum has turned positive as the MACD (moving average convergence divergence) index generates a buy signal. The RSI is also moving higher after printing oversold reading last week and now is reflecting a level of 33, which is on the lower end of the neutral range.

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