The euro, for it’s part, has steadied around the 1.16 level against the USD. This comes on the heels of the release of optimistic preliminary Consumer Price Index (CPI) data for the euro area in November. The European Central Bank (ECB) is in wait-and-see mode. In fact, markets don’t see any change in policy at the next ECB meeting on 18 December. The euro’s stability signals that financial markets believe economic indicators are on target as the report meets expectations economically.
The first batch CPI numbers showed a modest inflation surprise with headline inflation coming in at 2.2% year-over-year compared to a 2.1% expectation. Core CPI held firm at 2.5% year-over-year, the same as last month. Economists are stressing that this data supports ECB’s dovishness. It offers slippery clarifications but little justification to alter their position.
“The data offer little to change the [ECB] off of its neutral stance and markets are pricing no policy change for the next meeting on December 18.” – fxstreet.com
The euro is trading above the psychological 1.0 level but it faces immediate resistance at several levels. Important resistances to monitor include 1.1640, 1.1700 and then 1.1750. Current 50-day moving average is located at 1.1613, which is serving as a resistance for the currency. On the downside, analysts caution that resistance levels may limit any immediate upside for the euro. While they do see the pair strengthening, they only expect it to range trade between 1.1580 and 1.1680.
The one signal the ECB is surely sending via its interest rate differentials is active support for the euro. Market dynamics have become a most unfortunate check on its potential windfall. The Germany-US two-year yield spread remains just below its recent 14-month peak. Meanwhile, this trend reflects the fact that institutional investors are still very much skittish on euro-denominated assets compared to their US counterparts.
“We see resistance at 1.1640, 1.1700, and 1.1750.” – Scotiabank’s Chief FX Strategists Shaun Osborne and Eric Theoret
The Relative Strength Index (RSI) has moved back above the midpoint 50 level. This move suggests we could see a wave of euro bulls flush through in these favorable circumstances. While analysts are allowing themselves some optimism, they are not getting ahead of themselves. The balance of near-term risks might be skewed toward the upside.
“We remain assured by the RSI’s push back above 50—into bullish territory—and see the near-term balance of risk as favoring further upside.” – Scotiabank’s Chief FX Strategists Shaun Osborne and Eric Theoret