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Can Angela Merkel's Comments Drive Euro Through 1.14?

Published 23/05/2017, 11:26 am
EUR/USD
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Originally published by AxiTrader

The election of President Trump as US president has been a game changer on many political conversations across the globe.

Whether it is America First, trade relations, getting partners to in NATO - and other alliances - to spend more on their own defence, climate change, or even foreign exchange markets, the US president has changed conversations and actions of partners and adversary's alike.

It's against this backdrop that German chancellor Angela Merkel last night did something we often only see when national leaders are trying to defend their currency from speculative attack.

Merkel said the euro was too weak and ignited a rally in EUR/USD which took the single currency to its highest level since US election night last November.

To be sure Merkel was talking to students and explaining how the German trade surplus worked. But as an experienced politician and head of government, she also knew that her words would reverberate around the globe and be heard by president Trump who is attending NATO and G7 meetings in Europe this week.

Merkel told students that the Euro was "relatively weak" but then hardened up her comments. "The euro is too weak ... due to the ECB's policy and with this, German goods are comparatively cheap," she said.

And thus the euro rallied to a high around 1.1260/65 before pulling back to 1.1237 now. That's a rally of 2.55% since the post French election low around 1.0850 on May 10.

Chart

That run has taken euro to what increasingly looks like nose bleed levels in the very short term with a rally of usually unsustainable slope - vertical.

Indeed while there is still a yawning gap between the Citibank economic surprise indexes for the US (-30.7) and Germany (-50.1) that gap has closed from more than 105 points last week to a little more than 80 now.

That's important with the release of German IFO and a raft of European (and the US) preliminary Markit PMI's released tonight.

Solid numbers could push euro higher.

And while my target for some time has been the 1.13 region - Trump election night high - the bulk of my position is now exited on last night's run.

That's particularly the case because the euro has so sharply exceeded the level that with the German-US 10 or 2 year bond spread would suggest makes sense.

Chart

So there is room for a pullback. Especially given we are heading toward the next FOMC meeting and likely rate hike in the US.

But as the ECB moves toward it's own tapering in the next few months there is every chance that the bond spread continues to close as the European recovery takes hold. That would be supportive of Euro for an eventual move toward 1.1410/50.

Chart

But's it's only a break of this level which would signal a much stronger Euro. Perhaps back to the break down level of 2014 near 1.18.

I wonder what Mrs Merkel might say about the euro then.

Have a great day's trading.

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