– EUR / USD supported at 1.2050 before attempt at 1.22
– Euro breakout pressure increases as Fed policy weighs on USD
– PMIs and ECB focus on euro as some economies reopen
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The Euro-Dollar exchange rate maintains a return trajectory towards 2021 highs as the new week opens after vigorously recovering from a rapid and seemingly decisive setback inflicted by the US dollar and the bond market in the latter days although it has returned to these levels can be a slow burn affair.
The single European currency was pushed to a low of 1.2050 last Thursday when the dollar jumped after it was revealed that US inflation had nearly doubled to more than double the level targeted by the Federal Reserve (Fed) in April, although stabilization and recovery were rapid.
The surging dollar was a sign of a market revisiting a hitherto contested assumption that the Fed might end up raising its interest rate sooner than it currently anticipated, though, just as with other recent dollar rallies, the dollar’s movement quickly failed.
European currencies, including the euro, have offered attractive buying opportunities for investors following recent dollar surges, while the euro-dollar rate itself has proven to be more resilient to greenback openings. during the aforementioned periods than many had anticipated.
“EUR / USD fell yesterday but remains above the short-term uptrend at 1.2060,” said Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.
“We are looking for a new test 1.2210 / 43, the 78.6% retracement of the move seen this year and it is possible that this will cause some profit taking. This is considered the last defense for 1.2349, the high of 2021. “
Above: Euro-dollar rate displayed at daily intervals with Fibonacci retracements from 2021 drops alongside the US dollar index.
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As with other currencies, the international appetite for the dollar has been a dominant influence on the euro in recent weeks, although a temporary and subtle shift in market sentiment towards the single currency is also occurring.
“After a slow start to its vaccination campaign, the eurozone economy is reopening and this is attracting uncovered foreign portfolio inflows to the region’s relatively cheap stock markets,” says Manuel Oliveri, strategist in Credit Agricole CIB.
“The euro should benefit from any spillover growth from the booming US economy as US domestic demand for eurozone exports picks up from here. This would be consistent with past historical evidence that the USD TWI tended to suffer during times of global trade recoveries, ”he adds.
The European economy had looked for months as if it was about to fall behind in the race to draw a line under the pandemic period and the coronavirus-inspired activity restrictions this year when the European Commission vaccine purchase plans have gone awry.
GBP / EUR forecast 2021
Period: From the second quarter of 2021
FX Guide for Businesses
Period: From the second quarter of 2021
However, and since then, the bloc has stepped up buying and production as the eurozone economy has proven to be more resilient than originally feared, while the Fed’s commitment to June 2020 to leave its interest rate at effectively zero for years until employment and inflation have predefined targets. over an extended period of time.
“With the Fed firmly on hold, we don’t believe that a rise in inflation will support the dollar, and we continue to expect broad depreciation (with a preference for long EUR / USD currently, given the acceleration of activity in the euro zone) ”, says Zach Pandl, co-head of global currency strategy at Goldman Sachs.
Fed rate-setting officials argue that they have no intention of adjusting their policy parameters until “further substantial progress” has been made towards repairing the labor market and settling down. are committed to keeping borrowing costs close to zero until inflation has spent sufficient time above the 2% level to also average 2% over an indefinite period.
This is something that could take a while and long enough for the European Central Bank (ECB) to have the possibility to modify its own monetary policy parameters before the Fed, which makes it a medium and long term incentive to sell the euro and buy the dollar; which is already beginning to be reflected in the bond markets.
Above: Euro / Dollar rate displayed at weekly intervals with 55-week moving average and US dollar index.
“Although the focus is on inflation in the US this week, developments in the euro area indicate strong support for the euro going forward,” says Derek Halpenny, head of research, global markets EMEA and international titles at MUFG.
“Despite due attention this week to the high US CPI report, it was the 10-year German bund yield that rose 5 basis points higher than the UST bond yield this past. week, underscoring growing optimism over the outlook for the eurozone. ,” he adds.
The Fed’s monetary policy and its impact on the dollar will be the center of attention again this week when the April meeting minutes are released at 7:00 p.m. on Wednesday, with investors likely looking for signs of doubts in the share of rate determinants. to find out if it’s really a good idea to keep interest rates that low for that long.
However, and once past Wednesday’s American wild card, the euro-dollar rate target is likely to turn quickly to Friday, as between 8:15 a.m. and 10:100 a.m., the last round of IHS Markit Flash PMI polls are broadcast before being followed by a speech to President Christine Lagarde.
Investors will be eager to see whether European PMI indices measuring activity in the manufacturing and services sectors can maintain last month’s records, while relative to the Fed, the dollar would likely be disappointed if the Federal Free Market Committee meeting minutes leave investors with nothing “hawkish” to chew on.
“We will also see the first revision of EZ 1Q GDP (seen at -0.6% Q / Q). Most important will be the first review of flash PMIs for May (Friday) – which are expected to remain strong as economies begin to reopen after third wave lockdowns, ”said Chris Turner, global head of markets and regional head of the market. search at ING.