EUR/USD: Spread correlations reveal relative CB policy dominance – Scotiabank

The Euro (EUR) is attempting to stabilize in the mid/upper-1.16s following US data-driven losses on Wednesday and Thursday, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

EUR remains vulnerable

"Risk remains elevated into the US PCE inflation release, and the outlook for relative central bank policy is dominating. ECB expectations have been remarkably stable since the Sept 11 meeting, however the latest run of better than expected US data have weighed on the EUR as markets have pared back their expectations for easing from the Fed. EUR/spread (2Y Germany-US) correlations are elevated and pushing toward 0.8 on a 21 day rolling basis."

"The euro area release calendar has been limited to stronger than expected ECB inflation expectations data. The euro area bond market is looking somewhat worrisome, given ongoing concerns about France’s budget and the lack of any progress in its attempts at fiscal reform. The France-Germany 10Y yield spread has pushed to its highest level since January, widening above 80bpts and risking a break to levels last seen in the early 2010s."

"The EUR looks vulnerable, having broken back below the previously cleared descending trendline. The 50 day MA (1.1679) trend indicator has also been broken, and the RSI has drifted into the mid40s. Medium-term support is expected around the mid August lows in the 1.1580/1.1600 area. We look to a near-term range bound between 1.1620 and 1.1720."