Forex: EUR/USD at 4-week high on upbeat German Consumer Climate

on Nov 27, 2013
Updated: Oct 21, 2019

**, Wednesday 27 November:**

The EUR/USD earlier today rose to a four-week high at 1.3612 after a data release showing that Germans are feeling the most optimistic about their country’s economic recovery and financial conditions since August of 2008.
GFK’s German Consumer Climate for December checked in earlier in the day at 7.4, beating forecasts for 7.1 and prompting the euro’s sharp upswing. The figure for this month was also revised upwards, from 7.0 to 7.4.

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After falling in the past three months, German income expectations jumped by 12.5 points in November to 45.2, which is the component’s highest reading since March 2001. The optimistic mood amongst respondents derived in part from the improved economic outlook, which rose for a third straight month to its highest level since July 2011. What’s more, the willingness of German consumers to resume buying also increased, climbing to a seven-year high.

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Along with heightened income expectations, the latest rate cut by the European Central Bank has almost certainly played a part in boosting the mood of German consumers.
The rise in the Consumer Climate index sparked a rally of the EUR/USD to a four-week high at 1.3612, reached half an hour after the release. However, the pair may have gone too far too fast, because short-term yield differentials as between European and US treasuries have recently diverged from the price of the currency pair (see chart below).

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Interest rate spreads are a long-term fundamental driver of currency movements for the reason that investors are willing to pay more for an exchange rate which benefits from a higher yield premium. Similar abnormal divergences provide opportunities for traders to close the fundamental gap, by buying the lagger and selling the leader.

On that footing, bears should note that this set-up does not automatically mean a lower EUR/USD, since it could also be a signal that European rates need to be higher. Nevertheless, the pair has eased marginally since the data release, slipping below the psychological mark of 1.36.
The US economic calendar today offers October’s Durable Goods Orders and Unemployment Insurance Initial Claims for last week, both due out at 13.30 UTC, and the University of Michigan’s revised Consumer Sentiment Index for November, at 14.55 UTC.
Right now, the EUR/USD is trading around 1.3595, up 0.15 percent intraday.
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