Why EUR Refuses To Fall

Once again, the euro is trading higher this morning despite the attempts of European policymakers to jawbone the currency. ECB member Weidmann said today that they must work to improve the competitiveness of the euro zone as a whole and two ways to achieve this goal would be through easier monetary policy and a weaker currency. Since last week's central bank meeting, policymakers have used every opportunity to make it clear that they are committed to increasing stimulus again if economic data continues to weaken and yet the euro refuses to fall.

Investors Do Not Want To See EUR Below 1.30
One reason why 1.30 continues to be rock solid support for the EUR/USD is because this morning's economic reports were better than expected, easing concerns about a continued pullback in the German economy. As we can see by the recent price action of the EUR/USD around this key level, investors either don't want to see euro below 1.30 or they are fighting hard to protect orders below that level from being triggered. For this reason, positive economic reports are having a more significant impact on the euro that weaker data and therefore this morning's surprise increase in German factory orders sent EUR/USD soaring. Economists had been looking for a 0.5% decline but growth in March matched the 2.2% growth in February. Previously, the drop in PMI manufacturing numbers raised concerns about one main component of Germany's economy and the latest rebound helps to ease those fears. However France is still suffering according to their industrial production report, which saw activity declined three times more than expected. Nonetheless, Germany has carried regional growth for the past few years so the focus remains on the health of the euro zone's largest economy.

Record High In DAX Supports EUR
Euro is also benefitting from the persistent rally in European and U.S. equities. The German DAX hit a record high today and U.S. stocks are also poised for additional gains. While economists have many concerns about the outlook for the euro zone, investors are optimistic and willing to assume risk, which translates into less concern and more complacency about the outlook for the euro. At the end of the day, EUR/USD is still a risk currency and with risk appetite improving, investors are brushing off the ECB's warnings. As long as stocks continue to rise, the EUR/USD will be able to hold above 1.30 but once equities turn, watch for a steep slide in the currency.

Credibility Of ECB's Threat To Do More
Finally, investors don't think the ECB's threat to do more is very credible. With some policymakers saying that the market over interpreted Draghi's recent comments, investors realize that the central bank is really trying to do is send a message to the market that they maintain an easing bias and are flexible enough to consider additional ways to stimulate their economy. In reality however, the bar for another rate cut let alone negative deposit rates is high and it will take a significant slowdown in regional growth for them to consider easing again.

Kathy Lien, Managing Director of FX Strategy for BK Asset Management.