Euro Hits 14-month Low as Interest Rates Buoy the Greenback

EUR/USD hit fresh 14-month lows at 1.2859, falling quite sharply after breaching the 1.2870 during the Asian trading session. Favorable yield differentials continue to underpin the greenback, with the 10-year T-note over Bund spread having risen to new major-trend highs above 150 basis points. The next level of target support on the currency pair is seen near the July 2013 lows at 1.2755.  Resistance is seen near the 10-day moving average at 1.3055.

The ECB vice president told CNN late Monday that Draghi already said that the ECB does not exclude any instrument that is legal and within the central bank’s mandate and that there are still “further tools” the ECB can use. This leaves the door open for fully blown QE and broad based asset purchases. Constancio said that the ECB expects that after the painful reforms in the periphery other countries will move toward the center of Europe  and will also do reforms that will help to increase potential growth in Europe.

The EU delayed new sanctions against Russia for at least a few days. Officials Monday agreed a new package of sanctions against Russia, which reportedly include excluding some Russian state-owned defense and energy companies from raising capital in the EU. The full details were originally due to be published Tuesday, but governments decided to put on hold the implementation of the new sanctions for at least a few days, to assess the viability of the ceasefire in the Ukraine. This also means that the risk of further trade retaliation from Russia, which may include a closure of Russia’s airspace for European planes, is banned for now.

Momentum on the currency pair is negative as the MACD (moving average convergence divergence) index prints in negative territory with a downward sloping trajectory.  The RSI (relative strength index) moved lower with price action reflecting accelerating negative momentum while printing a reading of 16, which is well below the oversold trigger level of 30 and could foreshadow a correction.