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Contributors What Caused EURO to Hit 6 Month Highs?

By Kathy Lien

European currencies are testing the top of their recent ranges today with the euro hitting a 6-month high against the U.S. dollar and the Swiss Franc reaching a 2-month high. While new milestones were not reached in sterling (yet), the currency pair 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 ECB’s concerns about inflation. At the same time, no U.S. economic reports are scheduled for release today.

So what caused the breakout in euro?

We believe it’s the combination of a decline in U.S. yields and optimistic German growth forecasts that has driven the euro higher. Ten year Treasury yields are poised for their first decline in 4 trading days, which put pressure on the dollar against many of the major currencies. In a speech this morning in Northern Germany, Finance Minister Schaeuble said he sees 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 had anticipated. Yet 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 5.8 billion euros and is scheduled to get another 1 billion euro payment in October.

Schaeuble’s optimistic outlook for Germany will spur expectations for stronger August PMI numbers, expected on Thursday. A healthier Eurozone recovery and uneven U.S. economy has allowed EUR/USD to rally despite the threat of Fed tapering and the support that it may provide for the U.S. dollar. If EUR/USD manages to hold the breakout above 1.34, the next level of resistance will be 1.35.

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