Here's Why The Euro Surged

 | Jun 02, 2015 05:29PM ET

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

The 5 Reasons Why EUR Jumped 2%

The biggest story in Tuesday's financial markets was the 2% rise in the EUR/USD. The single currency experienced its strongest one-day rally this year and the move was driven by not one but five distinct factors:

  1. Greek Debt Deal
  2. Weaker US Data
  3. Stronger Eurozone Data
  4. GE-US Yield Spread
  5. Speculative Positioning

First and foremost, the euro would not have experienced such a strong rally if not for the prospect of a deal between Greece and its creditors being announced as early as Wednesday. According to key officials, the EU and IMF have reached an initial agreement that would unlock additional bailout funds for Greece. The Eurogroup will review the document on Wednesday after which it will be handed over to Greece, which needs to sign off on the terms. And that last part won't come easily, especially since the Greek government has submitted its own proposal. With the end-of-the-month deadline looming, both sides are working quickly toward an agreement. All that said, more talks may be needed for a middle ground to be reached. Which means that an official deal may not be announced until the end of the month with more back and forth between now until then. Unless progress is made every single day -- and evidence of that makes headlines -- the euro may find it difficult to extend its gains before an official agreement is made.

The EUR/USD also received support from stronger Eurozone and weaker US data. Consumer prices in the Eurozone grew at a faster pace, easing some of the central bank's concerns about low inflation. In contrast, US factory orders dropped 0.4%, which was more than expected and according to IBD/TIPP, economic optimism soured in June. This divergence in data caused the yield spread to widen significantly in favor of the euro. While 10-year Treasury yield rose 8.5bp today, German bund yields of the same maturity rose 17.3bp. Recent changes to GE-US 10 year yield spread can be seen in the chart below. Finally, speculators continue to hold significant short EUR/USD positions and Tuesday's move triggered broad-based short covering.