Euro Run Back to $1.4850

The euro broke below $1.45 support briefly in the knee jerk response to the disappointing US jobs data. However, more critical support near $1.4470 held and the euro has made new highs for the session. While the close will be important, the price action suggests the nearly 2 week and 3.5 cent correction may be over. Good buying was reported from sovereign and other long term investors on the pullback.

While we retain a constructive medium term dollar outlook, our near term concern was that interest rate differentials provide a powerful incentive to use the greenback as a funding currency. Recent developments, including the softer US data and Fed comments have caused a swing in rate expectations and has seen US rates fall and the yield curve flatten. US debt instruments have outperformed Germany and the interest rate differentials have moved against the US.

We have often found the 5 and 20 day moving averages to be a useful trend indicator. The euro's pullback has seen the 5 day moving average fall below the 20 day, for the first time since late Aug. This would be a negative technical development for the euro, but we suspect that this would likely be a false signal. To boost confidence that the move to re-test the highs is underway, look a move through yesterday's high $1.4668 would be helpful.