The EUR/USD appears to be on the verge of covering the bearish gap left behind at the weekly open exactly two weeks ago, with the shared currency now supported by a strong economic report in Italy and mixed comments from a central bank official.
The euro surged higher on Monday morning, placing the $1.39 handle back within eye distance. Part of the initial move may have been in sympathy with its neighbour's currency, the sterling pound, which appeared to have benefited from Pfizer's confirmed interest in UK pharmaceutical group AstraZeneca.
However, the shared currency appeared to garner further support from the release of strong consumer confidence survey numbers in Italy and comments from Bank of France President Christian Noyer.
Specifically, Italy's consumer confidence index rose to a reading of 105.4 for the current month after a print of 101.9 in March, Italy's statistics office ISTAT reported. The consensus estimate had been for a fall to 101.
ECB's Noyer looks at high euro impact on low inflation
In the introductory letter for the Bank of France's annual report, Noyer wrote that the Eurozone has stabilised and can return to a path of growth thanks to three inter-related events: adjustment efforts in many countries, success in establishing the banking union and the reduction of internal financial volatility and financial market segmentation following more than three years of serious difficulties.
Noyer noted the risk of inflation being too low but pointed out that temporary and global factors are at play, such as declining import prices, notably in the case of raw materials and energy and deeper and more permanent forces: such as high spare capacity, the de-leveraging process in the private and public sectors and the restoration of competitiveness through wage and price cuts.
Noyer said that the euro's strength added to the problem of uncomfortably low inflation although he did not see an imminent threat of deflation.
Notably, he attributed the euro's appreciation to factors other than the ECB's monetary policy stance, particularly large capital flows from emerging countries into euro area markets, in particular those of the peripheral economies, which was reflecting of renewed confidence in these countries.
"Given the weight of imports in the euro area's GDP, such an exchange rate
development is a powerful deflationary factor," he said.
"An increase in the exchange rate is equivalent to an unintended and unwanted tightening of monetary policy."
Noyer is known for being concerned about a high euro exchange rate and has even suggested the possibility of a targeted exchange rate policy in the past.
With the top of the EUR/USD bearish gap standing at 1.3885, traders will be alert for a close above the level to confirm a bullish signal. Conversely, if the gap holds then the currency pair may be headed lower.
However, the pair is holding near that level so the potential for a new rally to ensue remains.