The euro was clearly outperforming at the start of the new month as it responded to another higher jump in German bond yields as investors reacted to the surprisingly strong inflation readings.
Accordingly, the price of the EUR/USD currency pair moved upwards, with gains that affected the resistance level 1.0692, and settled around the level of 1.0660 at the time of writing the analysis. Today, the euro will interact with the announcement of inflation figures in the eurozone.
German bonds fell and yields rose as investors priced in higher European Central Bank (ECB) interest rates after higher-than-expected German CPI inflation data. German CPI rose 0.8% m/m in February according to statistics agency Destatis, beating expectations for a 0.6% reading. In the year through February, inflation rose 8.7%, unchanged in January but beating estimates at 5.8%.
German data followed unexpectedly similarly strong results in Spain and France the previous day.
The data prompted investors to raise their expectations about the number and size of interest rate hikes coming from the European Central Bank, which in turn pushed up regional government bond yields. “Markets are peaking higher in ECB borrowing costs at around 4% from recent estimates closer to 3.5% also putting a tailwind on the euro,” says Joe Manimbo, senior forex analyst at Convera.
After the data, the two-year German bond yield rose to its highest level since 2008 at 3.18%, outpacing advances in its US and UK peers, and pushing the euro higher against the dollar and pound as a result. According to analysts, “The German two-year has been going in a parabolic trend for several months now, but it has recently risen at an explosive rate, finally breaking through 3.2% overnight. This pulls EUR/USD off its lows and prevents the pair from breaching the support at 1.0500.”
Rising bond yields motivate investors in the Eurozone to return capital to the Eurozone economy as they can now expect higher yields on bonds. This reflects the outflow that was present during the years when the European Central Bank cut interest rates in the Eurozone heavily as it struggled to keep growth high. The euro's strength will also reflect the unexpected news that China's factory sector experienced a sharp rebound in February, increasing the possibility of an increase in high-value exports in the eurozone to China.
China's PMI reading came in at 52.6 in February, up from 50.1 in January, the strongest growth in the series since April 2012, said China's National Bureau of Statistics. The services PMI came in at 56.3, up from 54.4 and ahead of expectations of 55.0. The Caixin PMI reading came in at 51.6, up from 49.2 and ahead of expectations of 50.2. China's economy is recovering faster than economists expected, boosting growth-supporting currencies and penalizing safe-haven names like the dollar. Analysts add, saying: “Throwing signs that the Chinese economy has returned strongly from its worst year in decades, and that was enough to fuel the appetite for risk that reduced the demand for the dollar as a safe haven.”
Technical analysis of the EUR/USD:
- In the near term, according to the performance of the hourly chart, it appears that the EUR/USD is trading within a sharp descending channel formation.
- This indicates a strong short-term bearish bias in market sentiment.
- Therefore, the bears will be looking to extend the current declines towards 1.0560 or lower to 1.0538.
- On the other hand, the bulls will look to pounce on profits at around 1.0660 or higher at 1.0690.
According to the performance on the daily chart, it appears that the EUR/USD is trading within the formation of a descending channel. This indicates a significant long-term bearish bias in market sentiment. Therefore, the bears will be looking to extend the current bearish move towards 1.0456 or below to the support at 1.0350. On the other hand, bulls will target long-term profits around the 1.0683 resistance or higher at the 1.0800 resistance.
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