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Andreas Zanin
Analysis | January 12, 2021

KTM FX Weekly: Take a break

  • The EUR fall for the third straight day to 1.2130 on a higher dollar.
  • Higher US Treasury yields supporting the dollar.
  • Further rising US real rates mean lower EUR.

The common currency continues to drop for the third consecutive day, shedding 90 pips or 0.50% after the dollar finding its foot at the major support zone. Traders are selling their G10 holdings as the market theme is moving away from US politics to rising yields.

The EUR started the week lower by 0.50%, logged third straight fall of 1.2130 on the firm US dollar. In fact, the EUR was mixed against the G10 currencies. Besides, US 10-year yields rallied to 1.15%, the highest level since March 2020. And the dollar traded higher at 90.50 against the basket of G10 currencies.

Last week’s EUR performance was largely related to the US dollar performance. Since dismal December US labor market data hit the wires last week, the dollar continues to bounce from 2018 lows against the G10 and EM currencies. On Friday, Biden called for further stimulus ease and promised to raise the stimulus cheque from $500 to $2000. The new fiscal package will be roughly USD1trn, according to Bloomberg, reported by Danske Bank.

FX positioning:

As per the CFTC data ending January 05, USD net shorts increased in December, and the euro saw its net positioning stabilize slightly above 20% of open interest, without any significant increase in net longs during the festive season, ING reported.

 

Further rising US real rates mean lower EUR in the coming days.

Beyond the chart patterns and FX positioning, rising yields grab the core attention since last week. 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. Eventually, the USD bids well against the basket of currencies. With the higher real rates, EUR and Gold shed some gains.

Besides, Bund 10-yr closed at -0.49%. Since November, the bunds have been trading between 0.50-0.70%.

Macros: The first week of the year 2021 brought the mixed PMI data. Flipside, the sentix overall economic index rises to a positive level at the start of the year for the first time since February 2020. This means that investors are ignoring the current lockdowns and have complete confidence in a successful vaccination strategy, according to Sentix.

  • Italian final December Manufacturing PMI at 52.8 vs. 53.7 forecasts. Previous was 51.5.
  • Final Eurozone Manufacturing PMI at 55.2 in December (Flash: 55.5, November Final: 53.8)

According to the IHS Markit, Eurozone Manufacturing PMI improved to its highest since May 2018 during the final month of 2020. Posting 55.2, up from 53.8 in November but a little softer than the earlier flash reading, the headline index was above the crucial 50.0 no-change mark that separates growth from contraction for a sixth successive month.

  • The annual growth rate of broad monetary aggregate M3 increased to 11.0% in November 2020 from 10.5% in October.
  • Final Eurozone Services PMI at 46.4 (Flash: 47.3, November Final: 41.7). Posting 46.4, the index recorded contraction inactivity for a fourth month in succession.
  • Final Germany Services PMI at 47.0 in December, up slightly from November’s six-month low of 46.0 but still well below the 50.0 no-change thresholds, as per IHS Markit.
  • Euro area annual inflation is expected to be -0.3% in December 2020, stable compared to November according to a flash estimate from Eurostat.
  • The sentix overall economic indexes for the euro area rose by 3.6 points at the start of the year and, at +1.3 points, is back in positive territory for the first time since February 2020, as per the official release.

Looking ahead, we will get ECB minutes. Data wise it will be a light week, but the focus remains on the US yields and the dollar movement.

 TECHNICAL OVERVIEW

The EUR started the week lower by 0.50%, logged third straight fall of 1.2130 on the firm US dollar. For the first time this year, the EUR was trading below 1.22 and lost the 20MA. So far, this year’s trading pattern resembles 2018. And 2020 was a mirror image of 2017. On both occasions, EUR outperformed against the dollar.

There is a possibility of range trading or trading lower in the week ahead. According to the candlestick chart, the key support levels for the EURUSD are placed at 1.2100 and 1.2000. 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 for 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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