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Euro soars on flight to riskier assets

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Euro soars on flight to riskier assets

The Federal Reserve surprised market participants with no action on Wednesday, failing to use the opportunity to begin to remove some accommodation when investors were prepared for a decline in bond purchases.  The Fed stated that the current economic environment did not warrant a change which caught many people off sides driving up the prices of riskier assets.

Unfortunately, despite given a strong reason for why the committee decided not to taper, the Feds credibility has taken a hit.  Even with improved communications and increase transparency, the market after the decision clearly shows that the Fed still has the ability to surprise.  Nearly 70% of economists surveyed prior to the release of the interest rate decision believed the Fed would reduce bond purchases by 10-15 billion dollars to 70-75 billion in purchases per month.

The yield differential, which measures the difference between interest rates in US and Europe, moved in favor of the EUR, driving capital flows into the European currency.  While US yields dropped precipitously, German bunds lagged generating interest in the European currency.

The surprise policy decision created liquidation in the dollar pushing the EURUSD currency pair above resistance levels created by a horizontal trend line near 1.3450.  The next level of target resistance is seen near the weekly highs created during February near 1.37. Support on the currency pair is seen near former resistance and then the 10-day moving average at 1.336.

Momentum on the currency pair is positive.  The MACD (moving average convergence divergence) index generated a buy signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread.  The MACD index moved from negative territory to positive territory confirming the buy signal.  The trajectory of the index is upward sloping which points to higher price action.

The RSI (relative strength index) which is an oscillator that measures overbought and oversold level, is printing near 70, which is slightly above the overbought trigger level and could be a warning sign that the EURUSD is poised to correct.

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