EUR/USD: Positive Data Surprises And Verbal Interventions

Includes: FXE, UDN, UUP
by: Vision Capital M.

After being unable twice to break the support level around $1.288 on Monday, the euro started to gain strength during the second day of the week. It traded as high as $1.3070 but started to lose strength after the data on EU retail sales came out. As of the time of this writing, the single currency trades around $1.3030/40 level. Technically, the first minor resistance line on the upside is that $1.3070 level, the next one is around $1.3110 and if that level is surpassed, the single currency might further advance to the $1.3140 area. Still, this week's movement looks more like a correction than as a general change of the recent downtrend.

The Positive Events

Economic data from the week so far supports the advance of the euro. There were no major negative surprises on Monday, with the exception of Sentix EU investor confidence, which marked rather negative value (-10.6) than the consensus of -5.2.

On the other hand, the producer price index came out in line with the expectations, marking a slightly better-than-expected value on a monthly basis (0.6% vs. 0.5%). This supported the optimism in the market and resulted in advance of the euro above the $1.30 threshold.

The ISM New York index also marked higher-than-previous value (58.8 vs. 56.7), which was euro supportive.

Tuesday's data so far is still positive. The Markit indexes, both for Germany and the EU, came out slightly better than expected. This further induced optimism in the markets are resulted in today's euro advance against the USD.

Retail sales in Europe came out significantly better than expected, both on a monthly (1.2% vs. 0.2%) and yearly basis (-1.3% vs. -2.9%).

Overall, the higher probability of positive surprises which we wrote about in our last edition of the "EUR/USD: The Week Ahead" economic review is currently underway as the economic data so far presented more positive surprises than negative ones. Hence, the single currency advanced against the USD.

The Negative Events

On the negative side are the results of the above mentioned Sentix investor confidence index in Europe and the yields from the 6-month and 3-month bill auctions in the U.S. Those are events that went sort of unseen from the markets at first but they have a potential to influence negatively both the EUR/USD exchange rate and equity markets, in a short- to near-term. The main reason for this being the outflow of money from equities and risk-on currencies.

The yields achieved on the 3-month auction (0.11%) and 6-month one (0.12%) were lower than the previous values (0.125% and 0.135%, respectively). What is more important however, is the increased bid-to-cover ratio in both auctions compared to the previous ones. For the 6-month one, the ratio increase from 4.50 to 5.18, suggests an increased flow of money into government securities.

Verbal Interventions

Two Fed officials spoke on Monday providing further advance of the market expectations that the Fed will continue with it liquidity providing policy. Fed Vice Chairman Janet Yellen said, cited by Bloomberg, that:

"... the U.S. central bank should press on with $85 billion in monthly bond buying."

In a speech in Washington, Federal Reserve Governor Powell said the regulators are working towards relieving the society from the need to publicly finance a possible saving of any private organization deemed as being too-big-to-fail.

The comments of both Fed officials were aimed at easing the tension in markets as to whether the FED will continue with its monetary stimulus. They also tried to reassure the public that officials are working their way in solving the underlying problems that caused the recent crisis, namely the excessive risk-taking of some of the market participants.

Whether they would be successful in their efforts is about to be seen in the next days.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.