After being trapped in a 150 pip trading range for the past 2 weeks, the EUR/USD finally broke out. The currency pair cleared its 1.34 resistance to rise to its strongest rate since February 2012. At this stage of the move, the next area of contention will be between 1.3485 and 1.3525, where last year’s high, the 200-week SMA and 50% Fibonacci retracement of the 2011 to 2012 sell-off converge. This will be a very important level especially since 1.35 is a big round number. However, today’s rally in the EUR/USD has fundamental support and when that happens, there’s a good chance the breakout will gain momentum. Here are the 3 drivers behind today’s EUR/USD rally:

1. Strong German IFO

We started the morning off with very strong German economic data. Business confidence rose to its highest level in 7 months, a sign that the Eurozone’s largest economy will be leading the region’s recovery. With improvements in both current assessment and expectations for Germany, the IFO index rose to 104.2 from 102.4. The IMF downgraded their forecasts for Eurozone growth this year but between the strong increase in PMI and the solid rise in IFO, there’s a good chance that German growth will exceed expectations.

2. European Banks Make Big LTRO Repayments

The big story this morning was the large amount of repayment of the funds borrowed by banks under the ECB’s LTRO program. According to the central bank, 278 financial institutions plan to repay 137.2 billion euros next week, which is significantly more than the market’s 84 billion euro forecast. This suggests that the balance sheets in the financial sector are stronger than expected which bodes well for confidence in the Eurozone’s banking system.

3. U.S. Stocks Up, New Home Sales Plunge

The EUR/USD also benefitted from the continued rally in U.S. stocks. The S&P 500 climbed to a fresh 5 year high this morning despite disappointing housing market numbers. New home sales plunged 7.3% in December compared to a forecast for 2.1% growth. While the sharp upward revision to the previous month’s report took away some of the sting, the decline in December was still the steepest since February 2011. However, the median price of a home sold increased 1.3% last month, which is consistent with the rise in prices of previously owned homes. So while the new home sales report suggests that the housing market has hit a road bump, overall the sector is still recovering gradually.

We expect the EUR/USD to sustain its technical break and aim for 1.35.

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