Euro Momentum Stays Strong as German Inflation Provides Boost

  • Pound set for best streak since 2015 as shorts capitulate
  • Dollar gauge hits near nine-month low with little demand seen

Euro Bulls, Bond Bears React to Draghi Comments

The euro extended its gains and rose to levels not seen since May 2016 as momentum buying kept the shared currency above $1.14 amid better-than-forecast German regional inflation data.

European Central Bank President Mario Draghi may have suggested that the ECB is moving toward a less inflation-sensitive stance, but investors couldn’t overlook beats in consumer prices in Saxony and other German regions. Profit-taking and fresh supply was met by model accounts buying the dip each time during the London session, traders in Europe said.

Demand to own upside exposure in the euro stayed strong in the option market as well, with reverse knock outs and one-touches bid by leveraged accounts. Demand to hedge cash longs surfaced on tenors up to September, said the traders, who asked not to be identified as they weren’t authorized to speak publicly.

The euro nominal effective exchange rate has risen to its highest level since December 2014, essentially erasing the drop since the ECB unveiled its quantitative easing program. Further appreciation could push inflation lower and any announcement on bond tapering would have to be postponed to October, if not later, said Frederik Ducrozet, an economist at Banque Pictet & Cie in Geneva.

For now, euro bulls seem little concerned, as option gauges reveal. Bets that look for additional gains for the shared currency have risen to multi-month or multi-year highs across the curve, as shown by so-called risk reversals. It may require actual verbal intervention from central-bank board members specifically addressing euro strength before traders scale down such purchases as ECB sources haven’t done the trick.

  • The euro gained 0.3% to 1.1414 as of 10:29 a.m. London time, compared with its day high at 1.1435; resistance comes ~1.1450 where two-year trendline is seen
    • A close above exposes the May 2016 high at 1.1616
    • Large expiry Thursday at 1.1400 (EU1.2b) may weigh on price action: DTCC
  • The pound was on course for its longest winning streak in more than two years as Carney comments Wednesday changed the tune for bears
    • Risk-return on staying short cable is seen unfavorable for now given a hike by the BOE looks closer than before and Brexit talks have negative potential more in the medium- to long term
    • BOE’s Haldane says policy makers need to seriously look at raising rates, sends cable above 1.30 handle
    • Carney is due to appear on Bloomberg TV at 11:30 a.m. London time, discussing financial risks to climate change
  • The yen was the only G-10 currency to trade weaker versus the dollar as Asia stock markets advanced and Kuroda provided no surprise at the ECB forum
    • BBDXY was lower a third day with traders reporting very thin demand for the U.S. currency to fade recent weakness
    • Investors may be looking for release of next set of U.S. data with special focus on PCE deflator Friday before challenging the dollar’s drop
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