Euro’s April Rally Brings May Doubts About State of the Economy

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After staging the biggest rally in almost five years, euro bulls are reassessing the health of the region’s economy.

The common currency dropped versus all but one of its major peers after a purchasing managers index for manufacturing dropped in April. While euro-area consumer prices ended a four-month streak of declines last month, inflation is still stuck at zero. The euro also failed again to breach two key levels watched by those who study chart patterns, hindering its advance.

“The euro did have a nice April -- we’re seeing some signs of improvements -- but activities are still subdued, especially compared to what we expect in the U.S.,” Eric Viloria, a strategist at Wells Fargo & Co. in New York, said by phone. “On a relative basis, we see the U.S. economy being much better this year. And that supports the divergence theme.”

The euro slipped 0.5 percent to $1.1146 at 5 p.m. New York time. That follows a 4.6 percent surge in April that was its biggest monthly gain since September 2010.

Even with last month’s gains, the euro remains the worst performer of 2015 among 10 developed-nation peers tracked by Bloomberg Correlation-Weighted Currency Indexes. It fell 5.8 percent versus the group, compared with a 3.2 percent gain by the dollar.

‘Big Resistance’

The common currency failed for a second day to close above two key levels that marked its long-term downtrend, the 100-day moving average, which was at $1.1269 on Monday; and the 23.6 percent Fibonacci retracement of its decline since 12 months ago, at $1.1292.

“There’s going to be a big resistance,” Robert Sinche, a strategist at Amherst Pierpont Securities LLC in Stamford, Connecticut, said in a phone interview. Resistance refers to an area on a chart where orders may be clustered. “Now we’re coming back to levels that are more justified.”

Even signs that the European economy may have bottomed failed to help the currency surpass the resistances. Markit Economics Ltd.’s Purchasing Managers Index of manufacturing output dropped to 52 in April, from 52.2 the previous month, data showed on Monday.

Hedge funds and other large speculators reduced net wagers on a weaker euro last week after positioning reached a record high at the end of March, data from the Commodity Futures Trading Commission in Washington show.

“While we’re more optimistic about the euro region, we still think that the euro will continue to be weak as the economy doesn’t warrant a strong currency,” said Roberto Mialich, a senior foreign-exchange strategist at UniCredit Bank AG in Milan.

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