Euro sentiment has improved | Inflation is key

We wrote yesterday about the possibility that the Euro may not, after all, go as quickly to parity with the US dollar as was believed as late as the middle of last week. And sure enough, the market performance of the Single Currency in yesterday’s trading was impressive. In fact, on the weekly chart (above) it can be seen that last week came within an ace of being a bullish engulfing week (where the body of the weekly candle fully covers that of the previous week in the opposite direction) and at the close yesterday the exchange rate was comfortably above the open of the week before last. For Technical Analysis (TA) aficionados, this is a significant configuration. So is the fact that the exchange rate is so far below the 200 week Exponential Moving Average (EMA). This indicates an oversold EURUSD pair, and reversion- to-the-mean principles have it that this should at some stage be corrected.

Many market commentators also seem to have become far more benign in relation to the Euro, especially as it is likely to perform against the US dollar. This might have something to do with the comments of a number of FOMC members, notably Vice Chair Stanley Fischer and even Chair Janet Yellen herself, which have been widely interpreted to mean that, right now, they do not see core interest rate rises in the US until the very end of this year.

Inflation is key

Of course, that can change. Today sees the publication of inflation figures for the US, as well as for the UK (which mirrors to some extent the situation in the Eurozone). Given the current focus of central bankers everywhere on the current phenomenon of low and, in some cases, negative Consumer Price Indexes in particular, these reports will be closely watched by the markets.

Although the Bank of England governor, Mark Carney, has come around to the way of thinking that low inflation under current circumstances is actually a benefit for the nation’s economy, it also allows him the scope that he, and his counterparts in other jurisdictions, need in order to put off the day when it will be necessary for them to raise interest rates. That serves to keep the currency depressed.