Euro, EUR / USD, European Central Bank, PEPP, Inflation – Talking points:
- Equity markets gained ground during APAC trading, as investors continued to encourage the prospect of further fiscal stimulus outside the United States.
- The European Central Bank’s forthcoming interest rate decision will likely determine the short-term path of the euro.
- EUR / USD poised to regain lost ground as prices hover above key support.
Stock markets soared during Asia-Pacific trading as investors applauded the inauguration of President Joe Biden and the prospect of further fiscal stimulus. Australia ASX 200 the index increased by 0.79% thanks to better than expected job data, while Japan Nikkei 225 climbed 0.82%. China’s CSI 300 jumped 1.42%.
In the foreign exchange markets, AUD, NZD and NOK significantly outperformed while JPY, USD and CHF lost ground to its main counterparts. Gold and money price Yields on 10-year US Treasuries fell below 1.08%.
Looking ahead, the European Central Bank’s monetary policy meeting is making headlines alongside data on jobless claims from the United States.
DailyFX Economic Calendar
The ECB’s rate decision at a glance
The next European Central Bank monetary policy meeting is likely to determine the euro’s short-term trajectory, as the relentless surge in coronavirus cases in the trade bloc darkens the region’s economic outlook.
Spain yesterday reported a record 18,500 new Covid-19 cases, while the 7-day moving average of follow-up infections continues to hover above 15,000 in Germany, despite the imposition of a national lockdown at the end of November.
Cumbersome vaccinations in the European Union also risk lengthening the use of current restrictions, with only 1.4 vaccines administered per 100 people. In comparison, the UK inoculated 7.1 out of 100 while the US vaccinated 5.
New daily cases of Covid-19 in Europe
Source – ECDC
These restrictions had a notable impact on economic data, with consumer prices falling for a fifth consecutive month in December and core inflation hovering at a record high of 0.2%.
Nevertheless, it seems relatively unlikely that the ECB will adjust its monetary policy parameters at the next meeting, given that the central bank has increased the envelope of the Pandemic Emergency Purchase Program (PEPP) by €500 billion [and] extended the horizon for net purchases under the PEPP to at least the end of March 2022 ”at its meeting in December.
That being said, it is possible that President Christine Lagarde and the Board of Governors will vote on the strength of the exchange rate, in light of the constant disinflationary pressures the EU faces. However, the need for verbal intervention appears to have diminished as the euro has lost a lot of ground against its counterparts associated with the safe haven in recent weeks.
Therefore, the absence of any significant changes in the ECB’s monetary policy parameters and the lack of concern about the current level of the exchange rate could allow the euro to regain lost ground against the US dollar Short term.
EUR / USD Daily Chart – 50-DMA Higher Guideline Price
EUR / USD daily chart created using Tradingview
From a technical standpoint, EUR / USD rates look set to recover lost ground as prices remain constructively positioned above the 50-day moving average (1.2088) and range support. at 1.2050 – 1.2075.
The development of the RSI suggests a bullish momentum, as the oscillator turns away from bearish territory below 40 and considers a push above its neutral midpoint.
A daily close above 21-EMA (1.2156) would likely neutralize short-term selling pressure and open the door for buyers to probe psychological resistance at 1.2200. Clearing that probably draws a path to retest the January high (1.2349).
Alternatively, a daily close below the January 18th low (1.2053) could trigger a longer downward correction and set the old resistance to support at 1.2050.
The IG Customer Sentiment Report shows that 46.78% of traders are net-long with the ratio of short to long traders at 1.14 to 1. The number of net-long traders is 4.87% higher than yesterday and 0.32% less than last week, while the number of net-short traders is 6.70% lower than yesterday and 3.85% higher than last week.
We generally take a vexing view of crowd sentiment, and the fact that traders are net-short suggests that EUR / USD prices may continue to rise.
The positioning is less net-short than yesterday but more net-short than last week. The combination of current sentiment and recent changes gives us another mixed EUR / USD trading bias.
– Written by Daniel Moss, Analyst for DailyFX
Follow me on twitter @DanielGMoss
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