Euro: Spreads support upside bias against US Dollar – Scotiabank

Scotiabank strategists Shaun Osborne and Eric Theoret report EUR/USD trading in the mid-1.15s with modest gains versus the US Dollar (USD), supported by euro area Gross Domestic Product (GDP) and a return to trade surplus. Recovering yield spreads underpin the Euro (EUR), with their narrow fair value estimate at 1.1641, above spot. Short-term technicals are described as bullish, with support near 1.1500 and resistance around 1.1580 and the 200-day moving average.

Fundamentals and technicals align higher

"The EUR is entering Friday’s NA session with a 0.2% gain vs. the USD, pushing into the mid-1.15s while also underperforming most of the G10 currencies in an environment of broad-based USD weakness."

"The second euro area Q2 GDP release was in line with expectations, printing 0.4% Q/Q to deliver a 1.0% Y/Y pace of growth. The trade balance returned to a surplus in June, ending a short-lived deficit that emerged from March to May."

"Yield spreads are offering fundamental support and extending their latest recovery with a push through the mid-July high to reach levels last seen in mid-May. Our narrow fair value estimate based solely on the 2Y Germany-US yield spread has climbed to a fresh high of 1.1641, offering upside relative to spot."

"We see scope for additional sentiment and positioning-related gains, given that the options market continues to fade its premium for protection against EUR weakness while bearish CFTC data highlight vulnerability given the fundamental improvement in spreads."

"Bullish – the RSI is back above 60, suggesting renewed bullish momentum. The recent consolidation range has offered support at 1.1500 and resistance closer to 1.1580. We see broader support at the 50 day MA (1.1466), and additional resistance around the 200 day MA (1.1630). "

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