EUR/USD reaches 3-month closing high, amid further ECB-Fed divergence

Investing.com -- EUR/USD rose modestly to close above 1.13 for the first time in 2016, as investors digested further indications of potential divergence between the Federal Reserve and the European Central Bank, as banking stocks in the euro zone continued to suffer one of their worst weeks since the Financial Crisis.

The currency pair traded in a broad range between 1.1274 and 1.1376 before settling at 1.1323, up 0.0049 or 0.35% on the session. At session highs, the euro moved to fresh three-month highs against the dollar. EUR/USD has now closed higher in 12 of the last 14 sessions and is up by nearly 4.5% since the end of last month.

EUR/USD likely gained support at 1.0538, the low from December 3 and was met with resistance at 1.1496, the high from Oct. 15.

In Europe a host of major banking stocks fell precipitously, extending heavy losses from earlier in the week, after Sweden's Central Bank unexpectedly lowered its repo rate deeper into negative territory on Thursday. The move exacerbates concerns that other central banks in the euro zone could follow suit, amid low employment, weak economic growth and stubbornly low inflation. More broadly, numerous indices throughout Europe closed down between 2 and 3%, while the Euro Stoxx 50 fell to its lowest since late-2013.

On Monday, stocks in the euro zone fell to fresh 16 month lows as the cost of subordinate debt of European financial firms soared more than 12% on the session to its highest level in nearly three years. It came as crude futures slipped below $30 a barrel, placing further pressure on banks and the high-yield market. Last month, the Bank of Japan rattled global markets with a surprising decision to implement a negative interest rate policy for the first time in central bank history. With the European Central Bank's deposit rate already in negative territory, it marked the first time two of the world's top three central banks held rates below zero simultaneous.

The debate on whether central banks should adopt a negative interest rate policy was thrust back into focus on Wednesday when Federal Reserve chair Janet Yellen testified on Capitol Hill that she is unsure whether the U.S. central bank has the legal authority to push rates below zero. While Yellen testified that she is "not aware" of any restrictions that would prevent the Fed from offering negative rates, she does not expect that it will be forced to cut rates anytime soon. At a historic meeting in mid-December, the Federal Open Market Committee (FOMC) raised short-term interest rates for the first time in nearly a decade by lifting the target range on its benchmark Federal Funds Rate by 25 basis points to 0.25 and 0.50%.

On Thursday, Yellen told the Senate Banking Committee that although the Fed has not taken prospects for a negative interest rate policy off the table, she reiterated that it is unlikely the FOMC will lower short-term rates given its current economic outlook.

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The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, fell more than 0.40% to an intraday low of 95.28, before closing slightly higher at 95.64. Since the FOMC released its latest monetary policy statement on Jan. 27, the dollar has fallen by nearly 4%.

Yields on the U.S. 10-Year rallied late in Thursday's session to close at 1.66%, up one basis point. Earlier on Thursday, bond yields on 10-year U.S. Treasuries fell to 1.53%, their lowest level since April, 2012. Yields on the Germany 10-Year lost five basis points to 0.18%.