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The Cool Combo Fueling the Euro Breakout

The Cool Combo Fueling the Euro Breakout

Kathy Lien, Technical Strategist

It appears that the combination of declining US Treasury yields and improving German growth prospects are driving the euro’s recent rise, which is now trying to hold above the upper range barrier at 1.34.

European currencies are testing the top of their recent ranges today with the euro (EUR) hitting a six-month high against the US dollar (USD), and the Swiss franc (CHF) reaching a two-month high. While new milestones were not reached in sterling—yet—the euro is appreciating against the greenback for the fourth out of five trading days.

We can't attribute the move to data because the only economic report released from Europe was German producer prices, which declined in the month of July. Economists had been hoping for an uptick in price pressures, but unfortunately, weak demand is keeping a lid on price growth, which eases the European Central Bank’s (ECB) concerns about inflation.

At the same time, no US economic reports are scheduled for release today.

So What Caused the Euro Breakout?

We believe it's the combination of declining US Treasury yields and optimistic German growth forecasts that has driven the euro higher.

Ten-year Treasury yields are poised for their first decline in four trading days, which put pressure on the dollar against many major currencies.

Also, in a speech this morning in Northern Germany, Finance Minister Wolfgang Schaeuble said he expects 2013 GDP growth of 0.5% to 0.7%. This range is slightly higher than the government's official forecasts and more optimistic than what most economists and investors anticipated.

Most of his speech was centered on Greece and the need for another aid program, but according to a Greek Finance Ministry official, additional aid would be much smaller. Last month, Greece received an aid tranche of EUR 5.8 billion, and the troubled nation is scheduled to get another EUR 1 billion payment in October.

Schaeuble's optimistic outlook for Germany will spur expectations for stronger August PMI numbers, which are expected on Thursday.

See related: The 3 Biggest FX Event Risks This Week

A healthier Eurozone recovery and uneven US economic performance has allowed EURUSD to rally despite the threat of Fed tapering and the support that it may provide for the US dollar. If EURUSD manages to hold the breakout above 1.34, the next level of resistance will be 1.35.

By Kathy Lien of BK Asset Management

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