Forex Flash: Euro strength differs from general market sentiment - BBH

Marc Chandler, Global Head of Currency Strategy at Brown Brothers Harriman notes that the Euro has remained strong, even as the Yen and other currencies fell. However, it has still been trending lower since the start of the month and while he felt that the 1.3400 level would hold, it has not. Moreover, it appears that additional near term losses are likely.

Looking at technicals, he comments that the 5 day MA has crossed below the 20 and the similar trend line that the Dollar Index closed above comes in near 1.3280 and rises to 1.3320 by the end of the week. He writes, “A convincing violation suggests scope for addition 1-2 cent decline. On the other hand, the trend line drawn off the early Jan high is near $1.3440 on Monday and falls toward $1.3350 by the end of the week. A move above this trend line will help stabilize the technical tone.”

Chandler continues to note that the driver for the EUR/USD exchange rate is short term interest rate differentials. German short term interest rates have been more volatile than the US and the German 2 year yield has been the key. He sees that the German 2 year yield rose above 30bp last month and has slipped back below 20 bp. However, he writes, “it appears to be building a base above 15 bp and we expected caution ahead of the end of next week when European banks can begin paying back funds from LTRO II.”