EUR/USD: Euro Current Account Protection, Resistance Tough to Break Down

U.S. inflation fears have eased slightly following the latest CPI data, limiting dollar support. The euro has proven resilient in the face of political uncertainty, while Secretary of State Rex Tillerson's sacking has triggered fresh U.S. policy doubts. The Eurozone current account surplus should provide important underlying euro protection as credit fears increase.

The Italian bond market remained immune to political tensions on Tuesday, with a slight decline in yields even as Lega leader Matteo Salvini ruled out a coalition deal with the Democratic Party. Five-Star parliamentary leader Luigi Di Maio also stated that it was no longer time to leave the euro, which had a measured positive currency impact.

The U.S. NFIB small-business confidence index strengthened to a record high of 107.6 for February from 106.9 in the previous month. Within the survey, there were strong readings for capital spending and significant upward pressure on both wages and prices. Headline U.S. consumer prices rose 0.2% for February, with the year-over-year rate increasing slightly to 2.2% from 2.1% previously, which was in line with consensus forecasts. The core monthly increase of 0.2% was also in line with market expectations, with the year-over-year rate unchanged at 1.8%.

Although the data were in line with expectations, market concerns surrounding inflation tended to ease slightly, and the dollar dipped lower following the data, with EUR/USD moving above the 1.2350 level. There were still very strong expectations of a rate increase at next week's FOMC policy meeting, with futures markets indicating an 86% chance of a further 0.25% hike in rates. The potential for four rate increases this year also held steady at around 25%.

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The U.S. currency lost further ground just after the CPI release following media reports that President Trump had dismissed Secretary of State Tillerson. These reports were quickly confirmed by the White House, with Tillerson to be replaced by CIA Director Mike Pompeo. U.S. yields recovered some ground later in the New York session, although yield spreads were little changed, as German bund yields also edged higher and the dollar was unable to gain any traction. Concerns surrounding U.S. political and trade tensions were a significant factor in limiting dollar support amid global uncertainty surrounding tariffs and potential retaliation. The firing of Tillerson also increased global geopolitical concerns, especially surrounding Iran.

Wall Street stocks dipped lower to stand little changed, and there were underlying concerns surrounding strains in credit markets as the LIBOR-OIS spread widened to a fresh six-year high of around 48.5 basis points.

In this environment, the strong Eurozone current account position continued to provide important underlying euro support, with a further push higher to the 1.2400 area. Increased geopolitical concerns should still offer significant dollar protection, with risk assets under some pressure and fundamentals overall remaining relatively neutral.