EURUSD retreats from 1.20 handle
EURUSD tested the huge 1.20 handle yesterday but the newsflow couldn’t sustain it and price retreated towards 1.19 as USD-buying came into the market. The euro extended its losses Wednesday morning.
As the US session kicked off yesterday, stronger US ISM numbers and comments from the ECB’s chief economist weighed on the euro, which has staged an impressive winning streak since the March lows of 1.063.
Data boosts USD
European data releases left the eurozone manufacturing PMI for August mostly unchanged at 51.7 from 51.8 in July. While Germany and Italian manufacturing were up, Spain and France were lower. The second COVID wave in Spain is causing particular concern as it will add pain to the struggling services sector. The country posted more than 8000 new cases yesterday.
It was US ISM manufacturing data that changed the game yesterday though, posting an increase to 56 from 54.2. Sub indices saw new orders and production into the 60s. Although the employment sub-index revealed continued contraction, the headline number was well-received and the USD received a bid.
Then came remarks on the euro from ECB Chief Economist Phillip Lane in an online panel yesterday evening. He said although there is no ECB target for a EURUSD exchange rate, the euro’s price still matters due to its impact on economic activity and inflation. The remarks implied that if the EURUSD rate moves too high, the ECB would respond accordingly with monetary policy. The euro continued to fall.
So the question now is: will yesterday’s headlines push EURUSD lower for a few days as some of those long positions get flushed out of the market? On the hourly chart we can see that price has started to settle around 1.19 in the early asian session, so watch to see how this develops. Is it a pause before a move lower to 1.18 or will price find support here?
EURUSD 1-hr chart. Chart source data: Metaquotes MT5.
1.20 is a huge level - and a breakout above here on a daily closing basis would be a strong signal of continued euro strength. Remember that on the other side of the EURUSD equation is a weakening USD, and if the Fed are truly committed to higher inflation, they will need to push the USD even lower in the coming months.
EURUSD hold top of range with 1.15 in sight
The euro is holding the top of its range against the US dollar as traders despite no agreement yet reached on the EU’s €750bn recovery fund. Markets are holding out hope that an agreement can still be reached in the coming weeks or months - an event that should see EURUSD trade even higher.
The sticking point in negotiations is the portion of the recovery fund that will be handed out as grants rather than loans. The “frugal four” - that’s Sweden, Austria, Denmark, and the Netherlands - are resistant to a shared debt burden, preferring nations repay loans with a small interest rate. This fiscally-conservative faction requested only €350bn be handed out as grants rather than the proposed €500bn.
Although the negotiations are delaying the deal, it’s a promising sign that a compromise can be reached soon.
Strength in EURUSD right now isn’t just a euro story though, it’s also a US dollar story. Not only does Europe’s better handling of the coronavirus make the shared currency and European assets relatively more appealing, but the USD looks like it’ll trade weaker into the November presidential elections.
An immediate level to watch is 1.1447 - daily resistance since last Wednesday. A daily close above here would be the encouragement needed for a move towards 1.15, at which EURUSD last traded in January 2019. Such a move could be a catalyst to shake up global markets, as it would likely propel a weakening USD towards the 95 handle on the US dollar index (USDX), increasing selling pressure on the USD.
Euro trades to top of range - what’s next?
The euro is back at the top of its range against the USD as traders get a better feel for the shared currency. Not only could Europe be closer to fiscal unity in form of the €750bn recovery fund, but the region is preparing to re-open economies while across the Atlantic the USA is reporting record daily case counts and battered states pause reopenings. From that perspective, the euro has a relative appeal right now.
Euro traders are looking ahead to the EU Council meeting on Friday, where progress is expected on the €750b recovery fund. The fund proposes fiscal support in the forms of not only loans but also grants, a step towards the fiscal unity that France and Germany are calling for. Although we’re unlikely to get a final decision, an indication that the EU’s fiscally-conservative faction is open to the idea could pave the way for a decision later in the year. Progress here should be positive for the euro, but if decisions run into the weekend, markets won’t react until Monday.
EURUSD rose almost 0.5% yesterday from 1.1343 to closing just below the 1.14 handle. This morning in the early asian session, the euro pushed above 1.14 USD. The big question for euro traders: Will the euro once again find sellers at this level or is EURUSD about to break above the range to fresh highs?
It’s a pivotal point, so I’m watching how today’s daily candle shapes up. A close above 1.14 could encourage euro bulls into the market, whereas a close below 1.14 could inspire selling towards the bottom of the range.
Tomorrow’s ECB meeting should be a low-vol event after a big meeting last month. Tomorrow’s ECB meeting should be a low-vol event after a big meeting last month.