Marius Paun | London, UK | Senior dealer | Thursday, 03rd December 2020
On Tuesday, the EURUSD broke above the 1.2 level, driven by the risk-on investor sentiment, which continues to dominate world markets since the US election, and Covid vaccine announcements. At the time of writing on Thursday, EURUSD reached an intraday high of 1.2168 last seen in April 2018. It can be said the current rally is both a story of euro strength as well as US dollar weakness.
The US President-elect Joe Biden is expected to reengage with European partners and among the first steps is the elimination of Trump imposed tariffs on Transatlantic goods. Biden’s policies are seen beneficial to European companies as both sides now seem to align on a number of fronts including defence, security, sanctions, climate change and other multilateral projects.
The Covid-19 infections numbers in Europe are still high but it seems the positive news about vaccines has pushed the common currency up. It happened despite the fact that European Central Bank is now widely anticipated to increase its quantitative easing at its monetary policy meeting scheduled for next week on December 10th. The current support from the European Central Bank stands around 1.35 trillion euro and recent hints about recalibrating the monetary policy most probably means an expansion of PEPP (Pandemic Emergency Purchase Programme).
President Christine Lagarde reiterated ‘the risk for the euro area’s economy is clearly tilted to the downside’. We saw the eurozone’s unemployment rate decreasing slightly from 8.5% in September to 8.4% in October but still remaining at rather elevated levels. On top of that inflation in the euro area is still anaemic despite the stimulus. With the winter months ahead and lockdown measures still in place or prolonged into the new year, many are now sceptical things can get any better on the short term in Europe.
Across the Atlantic, the US Congress is yet to reach an agreement over the next stimulus package, although it appears that a $908 billion bipartisan proposal has started to get some traction in the last few days. Furthermore, the American politicians have until December 11 to agree on the $1.4 trillion budget or otherwise face the risk of a government shutdown. It’s becoming an issue this time of the year which in the end is sorted, but finding common ground in the current climate looks a bigger challenge.
It’s fair to say that the US dollar is on a downward path which means global monetary status is getting looser. It bodes well for risky assets. Emerging markets often exposed to volatility in exchange rates should particularly do well in this scenario. On one hand that resembles the credit expansion era before the financial crisis when the greenback grew weaker. It spiked higher in 2008 and continued to do so as the European Central Bank embarked on quantitative easing after being reluctant to apply it in the early stages. So the recovery, post-2014, brought a tendency of raising rates in the US but EU was only starting that game so was easy to maintain a weak euro. Now, on the other hand when Europe needs its currency weaker again they may struggle to achieve that. The way EU functions, it needs political consensus to deliver those recovery budgets and already some of the members (Poland and Hungary) refused to agree on the conditions.
There’s also the diversity of the European economies which makes it harder to find consensus. Southern European economies need a weaker currency while Germany for example showed signs of overheating pre-pandemic, signalling it might need a stronger euro. Going forward the US might start to do a lot of spending once Biden takes over while Europe struggles to agree on the much-needed stimulus. In the past the ECB started to get edgy when the EURUSD rate reached 1.2, now the rhetoric about currency wars is rather anaemic.
The chart shows the EURUSD finally breaking to the upside from the sideways range of the last 4 months, after trading largely within 1.16-1.2 channel. The short-term moving average (red line) is above the longer-term one (blue line) and both pointing higher.
On the upside, we can see the first line of resistance around 1.2150 marks. It tried to break that convincingly earlier today but so far it failed. If eventually, the bulls will succeed they will set their eyes on 1.222 which acted as good support in the spring of 2018. On the downside, sellers need to breach support around 1.2080 first followed by 1.1970. Further down, 1.1920 was good resistance now turned support so could be a more serious challenge for the bears.