The decline in EUR/USD today does little to change my fundamental view that what we are experiencing is a reflationary cycle as the deflationary forces of the European sovereign debt crisis have thus far not manifested themselves in a sustained way.
The market got particularly frothy yesterday after the WSJ reported the Fed was considering some modest further steps to ease quantitatively. The ISM indexes this week show the economy holding up better than feared and may delay or derail the move toward further extraordinary measures from the Fed.
The bulk of the gains in recent weeks have relatively little to do with the relative merits of the US or European economic recoveries and more to do with the fact that Europe survived what was a truly existential sovereign debt crisis. What we have is a reversion to the norm.
As long as we hold above the 1.3100 level, I expect the macro picture to remain unchanged: A world tentatively increasing its appetite to assume risk as investors veer away from the extreme pessimism of late spring.
