Euro: Stabilizing with policy support – Scotiabank

Scotiabank strategists Shaun Osborne and Eric Theoret say EUR/USD is stabilizing after Wednesday’s Fed decision, as improving Germany-US 2-year yield spreads and a hawkish ECB stance support the euro. With euro area inflation offering little surprise and markets pricing further ECB tightening, the pair is finding support in the mid-1.14s and near 1.1400, while resistance remains limited ahead of 1.1550.

Yield spreads back Euro recovery

"The EUR is entering Thursday’s NA session with a marginal 0.1% gain and showing signs of stabilization in the aftermath of Wednesday’s Fed. The outlook for relative central bank policy remains supportive of EUR strength and yield spreads are once again moving in the EUR’s favor, with a notable 7bpt jump in the 2Y Germany-US yield spread."

"The final euro area CPI release offered little in terms of surprise, with headline inflation remaining in the low 3% area and core hovering in the mid-2% range. Messaging from the ECB remains hawkish, and markets are pricing just over 50% chance of a hike in October with a cumulative 36bpts of tightening by December."

"Bearish/neutral – the EUR’s latest decline has been relatively sharp, dragging the RSI to oversold levels just above the threshold at 30. Short term price action is leaning toward stabilization however, with clear support observed in the mid-1.14s."

"The sharp nature of Wednesday’s decline offers little in terms of near-term resistance ahead of 1.1550, while further support is expected closer to 1.1400. "