EUR USD (1.4045) It would seem that only the absence of bad news was respite enough for the euro yesterday, and it rose for the first time in three days. Germany’s Ifo index showed that the business sentiment in that country is better than analysts had been expecting, although it came in unchanged from the previous month. Commentators were quick to point out that the apparent confidence was an affirmation of the ECB’s tightening cycle, and that it should bring traders’ focus back to the interest rates differential. Somewhat later, the EFSM auction of €4.75bn in 10-year paper for Portugal and Greece was deemed a success. The issue was well oversubscribed but, at 3.53 percent, the yield was admittedly higher than on two previous sales. But the US wasn’t without its own glimmer of light yesterday, as the minutes from the April FOMC meeting showed. The Dallas and the Kansas City regional directors both voted for a 25bp raise in the discount rate, citing upside risks to inflation. However the two votes were little more than a side note, perhaps a concession to price pressure, because the minutes showed the directors were more concerned about unemployment and were in no mood to raise rates.
Short-term traders likely used the recovery to sell euros, given that the risk for more weakness to 1.3910 or to 1.3800 is still open. The first sign of improvement would be a crossing of the 1.4160 hurdle, but we wouldn’t call the euro bullish until it mounts the 1.4310 resistance.
Market Bias Index
Traders’ increasing perception of the euro’s undervaluation came to a halt yesterday – the breakeven versus the US dollar lies today around 1.4310.
Deutsche Bank
Fixed Income Research – Global