EUR/USD is a supertanker. It takes a lot to turn it, and yesterday’s break higher was long overdue, as the European data had been steady and the US data deteriorating for some time with little impact on the currency. Whether this is a proper long term turn depends on how much trust we can place in the evidence of weak US and more solid Eurozone data and whether we believe that Draghi has more ammunition to halt the EUR recovery. I suspect we aren’t quite ready to believe that the US recovery is burned out so long term EUR/USD gains will have to wait. But even if the supertanker hasn’t made a longer term turn, it doesn’t reverse these sort of moves quickly. While rapid moves of this sort are often corrected for a period before extending, I would still be looking to buy a big enough dip. Technically, we have now achieved the 61.8% retrace of the 1.1495 to 1.0525 October to December decline, so I wouldn’t be chasing it as we may well see some retrace, but I think it will take real news, and not just a decent employment report tomorrow, to get us back below 1.10 with major supports now at 1.0980 and 1.0940. People may start to remember that employment data often lags the cycle.
For what it’s worth, I doubt that he US economy is really weakening dramatically. The data is unreliable in the short run and the short term impact of a weaker oil price may have been negative, but longer term effects are more likely to be positive. I wouldn’t rule out a rate hike this year, despite the latest market moves, though again, we need to see some numbers to get the market thinking that way again, and they aren’t going to turn up immediately.
Of course, Draghi won’t be happy to see EUR/USD spiking higher, and its rise will give him some ammunition to persuade the ECB Council that more easing is required. If he gets the desired further ease, EUR/USD will settle into a range again. I’m not sure he will but the market is probably going to bet on it ahead of the March meeting, so I think other currencies where easing is less likely are more attractive USD alternatives. The JPY is one possibility, and the easing has already been done so another move near term is unlikely, but you have to back weak equities to favour major yen strength. It’s quite possible, but I’m not quite ready to do that as even though the US data has been disappointing, equities get the comfort of lower yields, and European data has been less of a concern. I’m keener on the AUD, which looks ripe for a recovery if commodities stabilise, and the SEK, where the Riksbank’s threats look empty with EUR/SEK pushing 9.40 and growth remains the strongest in the developed world.