The euro is mostly lower today - the common currency is selling off against all major currencies except the Japanese yen. Last week, the currency headed lower as expectations for inflation increased. As comparable bonds offer significantly higher yields relative to Euro-area bonds (the delta between 10-year US and German government bond yields is near all-time highs), the euro is weakening as a result.
Turning to recent news and events, the stakes are high for this week's upcoming ECB meeting. As we wrote in a recent commentary, the euro bull market is running out of obvious catalysts. As growth decelerates while speculators increase their bets on the currency, expectations for monetary policy is one of the few remaining drivers for the euro. This week, traders will be looking for guidance from the ECB with regards to its asset buying program. Last week, German Bundesbank President Weidmann acknowledged significant weakness in Q1 economic data. Ultimately, we expect the ongoing bull market to end later this year. For now, our short-term outlook on the euro is neutral, while our medium-term outlook is bullish.
EUR/USD is flat and trading above 1.2270. The euro is up slightly against the yen, with EUR/JPY trading above 132.40. Finally, the euro is down slightly against the pound, with EUR/GBP above 0.8750.
Looking at this week’s economic events from the Eurozone, the most important event includes an upcoming ECB interest rate decision. Later today, we’ll see preliminary April Markit PMIs for both Germany and the Eurozone. On Tuesday, we’ll see IFO expectations for April (from Germany). On Thursday, the most important day, we’ll see the ECB’s latest interest rate decision and hear from ECB President Draghi. We’ll also see May GfK consumer confidence from Germany. On Friday, we’ll get German unemployment figures. We’ll also see a range of sentiment data from the Eurozone for April (services sentiment, economic sentiment, business climate, industrial confidence and consumer confidence). Last week, the ZEW sentiment survey for April was below estimates.
As the euro runs out of steam, we are downgrading the currency to neutral in the short-term. Looking at various technical indicators, the currency is trading within normal conditions. This is based on a daily chart of the euro currency index.
As the euro continues to strengthen, we are upgrading the outlook to bullish in the medium-term. Note that the euro is currently trading within normal conditions. Our analysis is based on various technical indicators when looking at a weekly chart.