The Euro (EUR) is strong, up an impressive 0.7% vs. the US Dollar (USD) and extending its recovery with a swift retracement of the pullback from its December highs, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

EUR/USD breaks 50-DMA, momentum shifts bullish

"Sentiment is dominating, as we note the exceptionally high correlation between the EUR and its 3M risk reversal, currently at 0.96 on a rolling 21 session basis. Fundamentally, the release calendar has also delivered a stronger than expected ZEW sentiment survey for both Germany and the euro area. The survey is widely seen as a leading indicator for industrial activity in Germany, offering reassurance to ECB policymakers who appear to have softened their hawkish communication."

"Comments from the ECB’s Villeroy have been decidedly neutral, highlighting risks to inflation on both sides. Finally, the ECB is set to welcome its first eastern European policymaker to its Executive Board. Boris Vujcic currently leads Croatia’s central bank, and he was nominated by the Eurogroup (the euro zone’s finance ministers) on Monday."

"The EUR’s latest surge is impressive clearing the 50 day MA (1.1666) trend level after finding solid support at the 200 day MA (1.1592). We see no material resistance ahead of the late December high just above 1.18. Momentum is shifting and the RSI has drifted back into bullish territory. A break of the late December high would shift our focus to the upper bound of the range from August, targeting the mid-September high at 1.1919. We look to a near-term range bound between 1.17 and 1.18."