EURO Marches Higher

The euro is inching higher on Wednesday versus the U.S. dollar. Given the forex market’s current run of unpredictable moves, only time will tell if the single unit is capable of taking on yesterday’s key resistance points, buoyed by a promising German Ifo survey that suggests the eurozone’s prospects may be strengthening. From a market positional standpoint, long U.S. dollars against almost anything remains the dominant reason for the EUR to climb.

Currency moves have been rather erratic since the Federal Reserve surprised investors by indicating that it’s in no rush to hike interest rates. Over the past few sessions, the EUR recorded some sharp swings and is currently clear of its 12-year low print recorded last week (€1.0464). The 19-member unit is within striking distance of the psychological handle of €1.1000. This is a massive level for any EUR bull. The failure to settle decisively above €1.1000 would suggest investors remain nervous that immediate further declines are ‘in the cards.’ However, it seems that euro-dollar investors’ preferred course of action is to wait-and-see if new data will confirm the positive momentum for the U.S. economy remains unaffected.

Inflation Pressures Remain Modest

Yesterday, U.S. consumer-price index (CPI) data for February delivered the first positive growth headline in six months, and it was the first gain in energy prices since June. Fed Chair Janet Yellen and many Fed officials have reiterated that the declines in energy prices are “transitory,” and this is the first hard economic data to support their contention. Last month, domestic U.S. gas prices rose +2.4%, the largest increase in nearly two years. Despite the modest climb in the headline print, underline inflation remains relatively benign, and below the Fed’s target to justify hiking rates sooner rather than later. The dollar weakened through the CPI release until the open of cash equity trading, with EUR/USD peaking at €1.1030, then retracing all of the gains seen over the previous session as it fell back to €1.0905 — its first line of support in today’s contained range.

Germany Show Signs of Solid Growth

The EUR’s rebound has come amid some improving economic data in the eurozone. Yesterday’s European regional (Germany and France) and composite business activity numbers expanded more than expected for March. While today’s German Ifo index print (107.9 versus 106.8) provides further evidence that the recovery in the eurozone’s largest economy continues in the first quarter. It seems that German firms have managed to shrug off fears over Greece, and a weaker EUR supported by quantitative easing (QE) is having a net positive effect as it helps to boost export expectations.

The index reports that business expectations for the next six months improved, while the current conditions indicator has also picked up, reversing last month’s fall. The report’s details suggest that the pickup is broad-based with manufacturing rising strongly. Perhaps the only concern for Germany is underestimating a potential Greek exit from the eurozone. There is a clear risk that if the crisis intensifies, it will weigh heavily on German and European business activity.

It’s not just the upbeat eurozone data that is pushing the U.S. dollar lower or pulling the euro higher, market participants continue to adjust their positions accordingly. The huge EUR/USD fall down to €1.0464 last week as European Central Bank QE got underway has EUR bulls eyeing scope for a larger correction. The €1.1062 (March 18) high is seen as too small. However, it’s low (€1.1098) after the Syriza Party’s win in Greece that put Alexis Tsipras in power could be a tough hurdle to overcome.

The euro bull is looking to the €1.1200-1.1300 handle for midterm relief. However, they will require further easing of pressure from the rates market to fuel further EUR gains. So far this month, fixed-income traders have managed to shave -12 basis points off the two-year Treasury/bund spread. It seems that EUR speculators are happy to set up buying dips below €1.0900 and €1.0875

Central Banks Continue to Surprise

Hungary’s smaller-than-expected rate cut yesterday proved a buy signal for HUF, pushing the forint to a 14-month high against the EUR (from €304 to the current level of €298.93). The -15 basis points cut (the market expected a minimum of -20 basis points), and the central bank’s widening of its inflation target to a +2% to +4% tolerance band while maintaining the +3% goal, suggests a “moderate” easing cycle.

However, the HUF’s strength, if it proves unrelenting, may warrant interest rate cuts bigger than what is currently being priced in by the fixed-income market. With an export-driven economy, a persistently strengthening HUF will be detrimental to growth. The market’s next major resistance level for the pair is €295.

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