Will the EUR/USD surge extend higher?

Early on Tuesday, the euro surged sharply at the expense of other major currencies, most notably the struggling US dollar. This sizeable euro surge was driven largely by continued positive economic data from the Eurozone, which has helped to keep the shared currency aloft despite a European Central Bank that has shown reluctance in tightening monetary policy. The most salient news boosting the euro on Tuesday morning was a better-than-expected German Q3 GDP reading of +0.8% against a prior consensus forecast of +0.6%. Additionally, Italy’s Q3 GDP was also strong at +0.5%, matching its best reading in around seven years.

Against the US dollar, Tuesday’s euro rise was pronounced, establishing a new two-and-a-half week high slightly above 1.1800, without substantially paring those gains throughout most of the day. The US dollar was heavily pressured on Tuesday by both this sharp euro surge as well as continuing concerns over US economic growth and the likelihood and timing of US tax reform. The dollar will be tested further on Wednesday by the release of US CPI inflation data for October as well as key retail sales data.

From a technical perspective, EUR/USD tentatively broke out on Tuesday above both a key descending trend line extending back to the early-September 1.2091 high, as well as the 50-day moving average. After Tuesday’s euro surge, EUR/USD should be driven more by the dollar than the euro for the remainder of the week. Helping to drive the US dollar will be the noted inflation and retail sales data on Wednesday as well as how the US tax reform debate plays out in the next several days.

If the US dollar remains pressured in the short-term after Tuesday’s dollar breakdown, EUR/USD could surge further towards 1.1900-area resistance. With clear monetary policy divergence between the Fed and ECB currently still prevailing, however, there is a strong possibility for an impending turn back to the downside and resumption of the EUR/USD correction from its recent long-term highs. The trigger point for such a resumption remains around the key 1.1600 support area.

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