EUR Rallies ‘Cause it Can

The pattern remains the same in the overnight session, another contained EUR trading range. However, if a currency is unwilling to head south, then there is a threat that it will want to trade at higher prices. This will certainly be testing the stamina of the weaker bear positions. Blinkered focus this week has been on Spanish refunding needs. A successful auction came and passed and still Italian and Spanish government prices continue to fall this morning. It seems they have failed to inspire renewed confidence in peripheral markets.

German Bunds yields are printing record low yields for a second consecutive day as investors maintain their appetite for safe haven assets. Spain is toying again with that psychological +6% yield, while French yields continue to build ahead of the first round of the country’s Presidential race this weekend. Uncertainty created by the first round of voting could push that country’s spreads even wider. The market remains concerned, and rightly so, about Spanish banks and their non-performing loans. The firepower, albeit waning, of the ECB’s LTRO doe not seem to be fooling anyone.

The single unit continues to test overall market patience. The currency has rallied this morning on the back of a stronger German ifo release. In a contained range, the definition of a rally seems to be as little as ten points, where is the volatility? German business confidence has again unexpectedly increased for a sixth straight month, with companies encouraged by signs that the Euro-zone’s largest economy is rebounding from the bloc’s slowdown. The index rose to 109.9 as manufactures regarded economic outlook “significantly more positive.”

This week the EUR has weathered softer US data, higher peripheral yields, the IMF spinning Spanish outlook and local “ring fencing” to little effect and not so positive rhetoric from ECB’s Praet with his comments on how many years its will take the region to overcome this crisis. However, expect option market rhetoric to try to apply some pressure on the unit as large expiries come due at 1.30 and 1.31 later this morning along with a 1.2950 barrier rolloff. The technicals have not changed so much, demand remains on dips, with the 21-day MA remaining in focus (1.2992). Selling failure remains an objective, there are offers front running Middle east interest ahead of the figure and with some stops just above. With market momentum remaining slow, the safe bet is for another consolidated daily range.

The significant surprise this morning was UK sales data. Last months print came in at a very strong +1.8% gain, ex-food and energy the headline revealed a firm +1.5% print. This certainly has given Sterling the upper hand against most of its trading partners. Bigger picture, if the BoE minutes this week were unable to convince you that QE is now likely for an extended pause, then this morning’s print will help persuade the market that UK policy makers are very much in a “holding pattern” on QE. Next week the Fed is up, and with the softer data of late, QE will be a question posed to Bernanke and company. For the BoE, no further evidence of downside risk to growth and with risks to inflation now appearing, there is no need for them to pull a QE trigger just yet. Now, with Bernanke and employment, it is very much another matter!

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Spanish excuse to sell more EURs?