Euro and USD experience diverging fundamentals

It’s all about the US dollar at the moment after the payrolls numbers inspired a fresh bout of greenback buying.

The dollar index is now looking to consolidate above 81 after having gone through a long period of underperformance. One of the interesting pairs to watch at the moment is EUR/USD as the increasingly diverging fundamentals of the two currencies point towards further weakness for the pair.

On the one hand you have a European central bank which is looking to stabilise prices after a recent CPI reading came in at the lowest level since 2009. This resulted in the ECB’s hand being forced and rates being cut. Additionally, the ECB is still looking at more ways to help bolster the economy with negative deposit rates and another LTRO on the cards.

On the US side of things, the Fed’s case for tapering is gaining momentum particularly after the bumper jobs numbers. There is plenty of talk around December tapering now and while it still looks unlikely, traders are still likely to pare USD shorts.

The week ahead, GDP readings dominate

The economic calendar for Europe is very light today, with Italian industrial production being the only reading to look out for. German Buba President Jens Weidmann is set to speak on the eurozone economy and following the recent rate cut decision we are bound to hear commentary around other measures the ECB might be considering.

For the rest of the week it’ll be all about GDP readings for France, Germany and the region. Any positive signs from the data could give the single currency some near term relief. In the US, Ben Bernanke’s speech on Thursday morning will carry significant weight. Any further hints on tapering will be USD supportive and in turn this will push the greenback higher.

Price action

After having recovered from Thursday’s lows at 1.33, which were printed following US GDP data, the pair came across further selling at around 1.345.

The NFP reading was a trigger for a move back below 1.34 with the pair now holding at around 1.335. Last week’s lows in the 1.33 region will be key near-term support for the pair; a break of which will put a huge dent in confidence. There should be enough support in the 1.32-1.33 region to prompt some near-term consolidation for the pair. Selling the pair into strength is my preferred strategy, particularly on any moves back towards 1.345.


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