Most EUR crosses were closed higher last week, with the inauguration of Joe Biden and the start of Central bank meetings providing enough cushion for investors to latch into. The EUR rose 0.80% against AUD, CAD, and USD, but down against oil-related currencies NOK and SEK.
The EURUSD rose 0.80%, rebounding from a very poor performance the week before; as US 10 yields rallied to 1.15%, so do the dollar. Late last week, some action crept into the EUR, with the European Central Bank leaves PEPP Bond buying “Envelope” at EUR1.85 Trillion.
ECB preview: The ECB leaves rates unchanged, will keep bond-buying in place until March 2022 or the end of the COVID19 crisis, will reinvest maturing bonds until at least 2023. And also, ECB highlighted that “The Governing Council decided to reconfirm its very accommodative monetary policy stance.”
As the market expected, the ECB did not deliver any surprises, which means hawkish stance. This eventually leads to higher EUR. Looking ahead, we don’t expect the ECB to expand the Pandemic Emergency Purchase Program further. And scale down of its APP could push the yields higher.
Macros: Flash PMI figures for the Eurozone updated last week, and the latest PMI data pointed to a further decline in the activity.
Data preview: Lack of EA macro data pushed the investor’s eye towards the Federal Open Market Committee’s January policy meeting. In the latest meetings, Fed officials have signaled that interest rates would stay lower through at least 2023, and no one expects a policy shift in its first meeting of 2021. Now we focus on the Fed’s new dot plot and the US real rates movement.
Further rising US real rates mean lower EUR in the coming days.
Rising yields grab the core attention since the beginning of 2021. Lower real rates and the expansive fiscal policy has been supporting the risk assets since the pandemic exploded in early 2020. But now the picture has been changed a bit with the real rates started moving higher, which could lead to re-pricing the Fed’s rate hike timing. In this case, the USD will bid well against the basket of currencies. With the higher real rates, EUR and Gold could shed some gains.
On Monday, US 10-yr yields closed at 1.05%, losing height after reaching the level not seen since the beginning of the COVID crisis. Besides, Bund 10-yr closed at -0.55%. Since November, the bunds have been trading between 0.50-0.70%.
TECHNICAL OVERVIEW
On the daily chart, the trading range has been framed between 20 and 50MA. We will trade between 1.2000-1.2230 before the Fed meeting. The corrective A-B-C pattern suggests 1.2000 is pivotal. A move below 1.2000 could confirm the reversal pattern, which is likely to trigger more weakness in the short term. But any fall below 1.2000 levels doesn’t change our higher EUR theme. For all the longs, 1.1900/1.1880 is the stop loss. If the price is moving higher, the key resistance levels to watch out are 1.2215 and 1.2285.
It is important to always keep in mind the risks involved in trading with leveraged instruments.
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