Where next for 'euphoric' EUR/USD?

It’s a very long time since we’ve heard a piece of Eurozone data described as ‘euphoric’. It’s also very rare that the German Chancellor should comment that ‘the euro is too weak’. Such is the life of the single currency and the numbers don’t lie - the single currency is the best performing currency this year up close to 6.5% versus the dollar. From its 14 year lows made back in January, we have had a series of higher lows which have driven up the price to levels not seen since November of last year. With the FOMC minutes looming this evening, it’s a good time to look at where EUR/USD goes from here.

Regarding the FOMC, market consensus is that the minutes from the last Fed meeting will reinforce expectations for another hike in June. At that meeting, the central bank downplayed the weakness in jobs and consumer spending, calling it ‘transitory’ in nature. And although more recent economic reports including yesterday’s PMIs show continued weakness in the US recovery, it would seem the bar is still very high to taking the Fed off its pre-set course of two more hikes which are most likely to take place when there are press conferences ie June and September. This week we’ve had a number of Fed speakers including Brainard and Kaplan expressing some confidence in this plan. As for hints on balance sheet strategy, it still seems early to expect much color on any details of this at this stage.

Eurozone data, on the other hand, has been hitting multi-year highs. PMI’s, for example, yesterday were strong across the board, whilst the German business survey (IFO) reached its highest level since unification, with businesses described as ‘euphoric’. We should caveat this positivity by the fact that Mario Draghi spoke today insisting he sees no reason to deviate from ECB policy guidance. Indeed, looking further into yesterday’s figures, it was the first drop in PMI price pressure in 15 months. We tend to think that if this is confirmed, then this will buy the ECB a bit more time going forward.

We can see on the EUR/USD daily candle chart, the series of higher lows after the multi-year lows at 1.0341 from the start of this year. The elimination of any ‘populist’ uprising in Europe is obvious in the gap in EUR/USD after the first round of the French Presidential elections. Prices consolidated above this gap beyond the 1.0850 area in the middle of this month but have been propelled further on investor’s concerns around the Trump trade.

This week, EUR/USD has retested 1.1265/70 a few times and we would now need to see some bullish consolidation if the pair can then push higher to the next key resistance area around the US election high of 1.13. Notably, interest rate differentials have been oscillating around 200bps for the 10year US/German yield spread, up from the lows of 220bps set in March. If these drop lower once more then EUR/USD may fall to 1.1076. That said, the medium-term structure is fairly bullish so if we do get consolidation, then 1.13 comes into view as prices rotate higher in line with the dominant trend.