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The Euro Consolidates as the Currency Pair Forms a Bottom

David Becker
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The dollar continued to lose ground on Monday as the risk on traded favored the Euro. Investors are retracing the recent loses seen in the equity markets, helping the EURUSD currency pair form a temporary bottom. It seems that market participants are now focusing on the possibility of a QE 4, based on recent dovish fed-speak which began at the end of last week during unstable market conditions. Inflation in German continues to slide, while the Eurozone current account eased.

The Eurozone posted a current account surplus of 18.9 billion in August, down from 21.6 billion in the July. The overall surplus remains robust, but the declining Euro could generate a further narrowing in the surplus in coming months. Direct investment actually improved, but portfolio investment outflows amounted to 27.8 billion after outflows of 12.4 billion in July.

Prices continue to decline which will not go unnoticed by the European Central Bank. German producer prices inflation fell -1.0% year over year in August, down from -0.8% year over year in the previous month. The declines in oil prices continue to play a role, but with growth slowing down the numbers will add to concerns that deflation is becoming more of a risk.

The technical picture shows that the EURUSD is attempting to form a bottom by trading above support near the 10-day moving average at 1.2723. Resistance on the currency pair is seen near the October highs at 1.2890. Momentum is positive as the MACD (moving average convergence divergence) index prints in positive territory with an upward sloping trajectory after generating a buy signal earlier in the month. The consolidative choppy trade has pushed the RSI (relative strength index), which is a momentum oscillator that measures overbought and oversold levels, to 49, which is in the middle of the neutral range which reflects consolidation.

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