EUR/USD, Calm Before Next Bullish Storm?

Includes: ERO, EU, FXE
by: FXstreet

The euro has been holding onto its gains at the start of the week, forming a consolidation pattern above the recently broken resistance at $1.34. Most market commentators and analysts appear to agree on the risk for further euro gains, as flows come back into European-denominated assets and the ECB stays in a 'wait and see' mode.

The price action in EUR/USD was limited last Monday, amid absence of European economic data. In the day ahead though, German and French consumer confidence data will be published, which may help to better understand how large the gap in sentiment has become between both economies. According to Kathy Lien, co-founder at BK Asset Management,

we expect to see consumers in Germany grow more optimistic as consumers in France grow more concerned.

However, as Kathy notes, "the divergence in the economic performance of the eurozone's peripheral and core economies has not stopped investors from pouring money into the currency", referring to an article from the FT, which highlights the growing capital being drawn back to eurozone's peripheral countries, over €100bn of private funds since late last year.

However, as the Financial Times stresses, the private inflows are still little if compared to the far larger outflows from 2011/2012, a time when the eurozone tail risk led many investors to remove huge sums of money from debt-exposed countries.

According to a latest Sentix poll shared by Forexlive:

Just 17.2% on investors believe one or more states could leave the G17 over the coming year. That's sharply lower from 73% in July last year and down from 25% in December.

The inflows to eurozone countries reflects how the risk premium has compressed in recent months, which has led to, as Jens Nordvig, currency strategist at Nomura, defines it, "a false hope about a turn for the better in eurozone activity data." Jens thinks conditions imply risk for further upside in the EUR/USD, "temporarily trading above $1.35, maybe testing the $1.37 that the technical analysts are focused on, before resuming a gradual (growth-driven) downtrend" he says.

Another trader who remains skeptic to participate on euro long positions, yet recognizes the bullish technicals in EUR/USD, is RBS currency strategist Greg Gibbs, saying that, while

the risk remains that the EUR continues to rise, we must remain vigilant to a shift in rhetoric in the ECB towards cutting the policy rate, at which point the EUR should top-out.

Greg expands:

The green shoots of recovery that some may be seeing in the periphery are unlikely to flourish and will be scorched by the headwinds of austerity, depression levels of unemployment, significant banking sector repair required and weak property prices in some countries. France is also diverging from Germany, threatening to open a dangerous front in the crisis.

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. I have no business relationship with any company whose stock is mentioned in this article.