EUR/USD: why is EUR so strong?

Euro’s holding the ground versus the greenback and conquering new highs. Yesterday EUR/USD closed above $1.3739 (Jan. 24 high) which used to be a strong resistance level, at $1.3756.

US dollar took a blow from soft economic data and news that foreign investors had been heavy sellers of US assets: there was an outflow of almost $120 billion from American assets in December, while the euro zone attracted inflows into stocks of 111 billion euro. Euro area has also shown an increased current account surplus which contrasts with the huge US deficit. As a result euro is likely to stay strong in the near term.

Of course, there’s an option that the ECB will cut its benchmark rate in March. Low inflation is the main argument in favor of such outcome. However, the recent better economic data makes the cut in rates less likely. As for USD, the market hasn’t started to price in the reductions of QE as investors remain pretty confused by the messages from the Fed. In short, for now there are no reasons to give up the longer-term bearish scenarios, especially as EUR/USD is approaching the long-term resistance line at $1.3890.

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