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The Euro’s 3-Way Safety Net

The Euro’s 3-Way Safety Net

2013-05-08 18:37:00
Kathy Lien, Technical Strategist
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Despite a host of downside price pressures, the euro has remained shockingly resilient, and factors including stop protection, equities strength, and central bank policies seem to be the reasons why.

Once again, the euro (EUR) is trading higher despite the attempts of European policymakers to jawbone the currency. European Central Bank (ECB) member Jens Weidmann said today the Bank must work to improve the competitiveness of the Eurozone as a whole, and two ways to achieve this goal would be through easier monetary policy and a weaker currency.

Since last week's central bank meeting, policymakers have used every opportunity to make it clear that they are committed to increasing stimulus again if economic data continues to weaken, and yet, the euro refuses to fall. Here are three potential reasons why:

Investors Fighting Hard to Protect 1.30

One reason why 1.30 continues to be rock-solid support for the EURUSD is because this morning's economic reports were better than expected, easing concerns about a continued pullback in the German economy.

As we can see by the recent price action of the EURUSD around this key level, investors either don't want to see euro below 1.30, or they are fighting hard to protect orders below that level from being triggered.

For this reason, positive economic reports are having a more significant impact on the euro that weaker data, and therefore, this morning's surprise increase in German factory orders sent EURUSD soaring. Economists had been looking for a 0.5% decline, but growth in March matched the 2.2% growth in February.

Previously, the drop in PMI manufacturing numbers raised concerns about one main component of Germany's economy, and the latest rebound helps to ease those fears. However, France is still suffering, according to the latest industrial production report, which saw activity decline three times worse than expected.

Nonetheless, Germany has carried regional growth for the past few years, so the focus remains on the health of the Eurozone's largest economy.

New Record High in German DAX

The euro is also benefitting from the persistent rally in European and US equities. The German DAX hit a record high today, and US stocks are also poised for additional gains. While economists have many concerns about the outlook for the Eurozone, investors are optimistic and willing to assume risk, which translates into less concern and more complacency about the outlook for the euro.

At the end of the day, EURUSD is still a risk currency, and with risk appetite improving, investors are brushing off the ECB's warnings. As long as stocks continue to rise, the EURUSD will be able to hold above 1.30, but once equities turn, watch for a steep slide in the currency.

The ECB's Willingness for More Easing

Finally, investors don't think the ECB's threat to do more is very credible. With some policymakers saying that the market over-interpreted Draghi's recent comments, investors realize that the central bank is really trying to send a message to the market that it maintains an easing bias and is flexible enough to consider additional ways to stimulate the economy.

In reality, however, the bar for another rate cut, let alone negative deposit rates, is high, and it will take a significant slowdown in regional growth for the ECB to consider easing again.

By Kathy Lien of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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