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Andreas Zanin
Analysis | February 23, 2021

KTM FX Weekly: Breakout higher looms for EURUSD

  • Sentiment buoyed by economic optimism.
  • The big theme in the markets recently is higher yields

Financial markets have spent the past one week pricing the inflation forecast as US and Germany yield shooting higher. Rising economic optimism is the reason behind the faster rally.

Since August, US Treasury yields have been rising, but since the beginning of 2021, the magnitude of the rise betting faster and thicker. Last August UST 10-yr rate bottomed around 0.5% and now closed at the highest level in three years at 1.37%. The US Treasury yield curve had steepened significantly, led by the long end, reflecting an increase in both inflation expectations and real rates, as per ECB.

Besides, 10Year Germany yields closed at -0.335%, up 1bps on Monday and been rising since December 2020 low -0.61%.

 FX:

EURUSD was rangebound during last week with no important moves. The pair managed to keep the previous week low and is now trading a tad below the key resistance level. Looking at last week’s data, the calendar data printed plenty of releases started with the euro area GDP and the week ended with PMI releases.

Away from the data, there were some insights from ECB minutes. Last week ECB Monetary meeting minutes threw some interesting insights with regards to financial conditions.

 ECB Monetary meeting minutes remarks: 

The Governing Council meeting for the ECB highlighted that “favorable financing conditions to protect the current highly accommodative stance in an environment of continued high uncertainty.”

In regard to the financial conditions, the ECB minutes revealed that “The euro area GDP-weighted yield curve had also remained very close to the level observed at the time of the Governing Council’s 9-10 December 2020 monetary policy meeting”.

One interesting thing is that 10-year GDP-weighted yield has been trading off its lows; when comparing this yield as a spread to the 10-year overnight index swap (OIS) rate, then we are at a cycle low- here’s the chart-source: Nasdaq.com.

  • Divyang Sha at Nasdaq said, “That the 10-year GDP-weighted spread has moved further lower suggests that there is room for the ECB to adjust PEPP purchase pace lower” And he also commented that, “Although any further reduction in PEPP purchases from the €13.2bn recent weekly pace will happen in a controlled and glacial manner. All the signs are still pointing to the ECB undershooting the €1.85tn PEPP envelope by some €250-300bn.”

 Data review:

Coming back to the economic data points, Flash European manufacturing PMIs surprised the Northside. Please see the latest Flash PMI figures below, published by IHS Markit. German Ifo also printed higher than expected as Sentiment among managers in Germany has improved noticeably.

  • In the fourth quarter of 2020, EA GDP decreased by 0.6% compared with the previous quarter, according to a flash estimate published by Eurostat, the statistical office of the European Union.
  • Flash Eurozone Services PMI at 44.7 (45.4 in January). 3-month low.
  • Flash Eurozone Manufacturing PMI at 57.7 (54.8 in January). 36-month high.
  • Flash Germany Services PMI Activity Index at 45.9 (Jan: 46.7). 9-month low.
  • Flash Germany Manufacturing PMI at 60.6 (Jan: 57.1). 36-month high.
  • The ifo Business Climate Index rose from 90.3 points in January to 92.4 points in February.

Looking ahead, we will get EA final CPI and fresh estimates of GDP for Germany and France. As per the IHS market, Prior data showed France contracting by 1.3% on the three months to December, but Germany eked out a 0.1% gain.

Moody’s Analytics said, “We expect France to have the worst quarter of the bunch, with GDP falling 1.3% q/q.”.

 TECHNICAL OVERVIEW

We would be concerned if EURUSD could not push-and hold -above 1.2200 over the next day or two. Traders may need to see the fresh GDP estimates for Germany.

On the upside, the trend is supportive, but the price needs to take out the 1.22 level to confirm the trend once again. The indicators point the price higher in the immediate term but must take off the key resistance to set the wave higher.

If you are a EUR bull, then focus on the EURCHF as well. The cross closed and trading above 100MA (Weekly) for the 1st time since November 2018. The A-B-C pattern suggests 1.1060 and 1.11+ are coming.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

What is your Technical View?

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