Euro: Stabilizing with policy support – Scotiabank

Scotiabank strategists Shaun Osborne and Eric Theoret report that EUR/USD is stabilizing following the Federal Reserve's recent decision. Improving Germany-US 2-year yield spreads and a hawkish stance from the European Central Bank support the euro. With euro area inflation already in line with expectations and markets pricing additional ECB tightening, the euro finds support in the mid-1.14 range and near 1.1400.

Resistance is limited ahead of 1.1550. The euro is entering Thursday's trading session with a slight gain of 0.1% and showing signs of stabilization. The outlook for relative central bank policy remains supportive of EUR strength, and yield spreads are once again moving in the euro's favor. A notable 7 basis points jump in the 2-year Germany-US yield spread is observed.

The final euro area CPI release provided little surprise, with headline inflation remaining low in the 3% area and core hovering in the mid-2% range. The ECB remains hawkish, with markets pricing a 50% chance of a hike in October, resulting in a cumulative 36 basis points of tightening by December. Bearish/neutral sentiment prevails, as the euro's recent decline was sharp, pushing the RSI above the oversold threshold of 30.

Short-term price action leans toward stabilization, with clear support observed near 1.1400. The sharp decline on Wednesday gives little indication of near-term resistance ahead of 1.1550, while stronger support is expected closer to 1.1400.