Fundamental factors affecting EUR/USD

Though it is good news that the EU managed to secure an additional 300M Pfizer/BioNTech vaccine doses, the EU’s comparatively slow vaccination efforts that saw its vaccination drive start over a month behind that of the UK and US’ might well come back to bite EUR in the coming months if a lack of herd immunity on the continent renders them unable to properly reopen their economies as fast as others.

Better than expected German trade numbers and modestly better than expected German and French industrial output numbers released early during Friday’s European session were unable to aid sentiment towards the single currency. Indeed, the pair didn’t even care much about monthly official US jobs data, which was a disappointment but hardly provoked any reaction at all. Markets seem not to care about any data at all right now, given the intent focus on the themes that will determine the global economic outlook for 2021; the pandemic, the post-pandemic recovery, central banks, the incoming Biden administration, and more US fiscal stimulus.

Focus this week has predominantly been on the US dollar, meaning EUR/USD has largely traded as such. The US dollar is stronger on Friday amid 1) continued pricing in of additional fiscal stimulus from a Democrat-controlled Congress that will accelerate the US recovery and may have hawkish implications on the Fed and 2) amid a rise in real US yields that makes buying US government debt a comparatively more attractive investment than it was this time on Thursday, thus triggering inflows into the US dollar.

EUR/USD breaks out of short-term uptrend

EUR/USD has broken below a short-term upwards trend channel that had been in play since December 2020; the uptrend support line that EUR/USD recently broke below linked the 9, 21, 23, and 31 December lows. The pair has now hit but rebounded from its 21-day moving average which trades at 1.22143. A more convincing break below the 21DMA and the psychologically important 1.2200 level would open the door the grind back down towards 1.2100 and even a test of key support just above 1.2050 (the 9 December low).

EUR/USD four hour chart

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Looking at the chart, I think we will continue to have a “buy on the dips” attitude, with the 50 days EMA underneath at the 1.20 level offering a bit of a “floor” in this market. I would be surprised if we broke down through it, so if we did then we would probably have to reassess everything. At this point though, it is obvious that the market has more of a proclivity to go higher, and I think eventually we will probably try to chew through the 1.23 handle, but it may take multiple attempts. To the upside, the 1.25 level would be the target if we do that, but we have some work to do obviously.

Most of this is probably driven due to the stimulus situation in the United States, so that should be paid close attention to as it looks now likely that we are going to see even more coming down the road.

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