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Currency action driven by Central Banks

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Currency action driven by Central Banks

The greenback gained strength against European currencies on the heels of Thursday’s central banks statements which show that both the ECB and BoE where commitment to accommodative policy for the foreseeable future.  The dollar surged as yield differentials moved in favor of the US dollar, as ECB president Draghi gave his first statement on forward guidance.

The ECB reassured market participants on Thursday that the rates would remain low for an extended period of time. When pressed to define an extended period, Draghi pushed back only stating it would not be a 6 to 12 month period.

The ECB has been forced into a situation where they needed to find a solution to increasing long term interest rates especially in the face of the recent volatility in Portuguese rates which climbed nearly 100 basis points after their finance minister resigned on Wednesday.  Draghi indicated that the current level of the refinance rate is not a bottom and negative deposit rates could still be in the cards.  The ECB also reaffirmed that they expect the European economy to recover later this year.

The interest rate differential between European rates and US rates on a 2-year basis moved in favor of the US moving down to 15 basis points which is the bottom of the current range dating back to September 2012.  The currency pair and the interest rate differential is generally highly correlated which is one of the reasons the Euro is lower.

The EURUSD currency pair continued to move lower testing support near the 1.28 level.  Momentum continues to point to a lower exchange rate as the MACD is printing in negative territory.  The exchange rate generating an RSI (relative strength index) print near 36, which is on the low end of the neutral range but above the oversold trigger level of 30.

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