The Euro (EUR) is strong, up 0.6% against the US Dollar (USD) and a mid-performer among the G10 in an environment of broad-based USD weakness. The latest EUR gains remain fundamentally driven, with yield spreads powering the currency to fresh highs reaching levels last seen in September 2021, Scotiabank’s Chief FX Strategists Shaun Osborne and Eric Theoret report.
EUR growth is powered by spreads via shifting Fed/ECB outlook
“The shift in the outlook for relative central bank policy is primarily being driven by the evolving outlook for the Fed, rather than the ECB, with euro area rate expectations hovering between 20-25bpts of easing by year end as markets aggressively reprice the outlook for Fed easing. Data releases have been relatively limited, with Germany’s GfK consumer confidence figures coming in largely as expected. In terms of the ECB, communication is broadly neutral.”
“Comments from the ECB’s Chief Economist Lane suggest that the central bank has ‘largely completed’ its goal of returning inflation to target. The trend is bullish and momentum is confirming the fresh highs in spot. The RSI has reached the overbought threshold at 70, underscoring the impulsive nature of this latest leg higher for EUR/USD. Recent rallies have seen the RSI peak out around 75, offering the possibility of some further near-term upside for now. “
“EUR/USD has largely reached anticipated resistance around 1.1750 and we now look to the 1.1850/1.1880 area as the next target. In terms of support, the 50 day MA (1.1385) remains important from a medium term perspective but is currently well below spot. We look to near-term support closer to 1.1600.”
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