EUR/USD: short-term EZ-US spreads remain tremendously USD-supportive - Scotiabank

Shaun Osborne, Strategist at Scotiabank notes that despite interest rate differentials have narrowed modestly in the EUR’s favour this week, the move does not support sustained gains in the EUR and short-term EZ-US spreads remain tremendously USD-supportive.

Key Quotes

“EURUSD’s rally extended further than we thought yesterday and made it to the upper 1.05 region in the overnight market as secondary PMI data (construction and retail sectors) for Italy, France and Germany were mostly better than expected before spot eased back. Interest rate differentials have narrowed modestly (~5bps) in the EUR’s favour this week but the move does not support sustained gains in the EUR and, at -197bps, short-term EZ-US spreads remain tremendously USD-supportive. We look for EURUSD to soften again. Our fair value model implies an equilibrium rate of 1.0167 for EURUSD currently.”

“EURUSD short-term technicals: bearish – We under-estimated the scope for the EUR to rally yesterday despite spot making headway through the mid/upper 1.04 resistance zone we identified, we are not convinced the rally can extend. In fact, the short-term charts suggest the EUR has topped and turned through the overnight session via an “evening star” bear reversal on the 1-hour charts and a (likely) outside range reversal on the 6-hour chart. Weakness below 1.0485 short-term retracement support should see the EUR extend back to the 1.0430/50 range at least.”