The EUR/USD has completed a bearish wave C and is now preparing for a bullish ABC towards 1.22-1.23. The GBP/USD is also looking bullish and is expected to aim at Wizz 7 level near 1.3860. The EUR/USD is expected to move up towards 1.21 to complete a wave A before building an ABC lower within wave B. A bullish bounce should confirm the start of a bullish wave C.

The GBP/USD made a strong bullish bounce at the 233 ema close. A bullish continuation is now also expected. A bearish pullback could offer an opportunity for a potential long setup.

At the time of writing, the Japanese Yen was down by 0.08% to ¥105.47 against the U.S Dollar, with the Aussie Dollar down by 0.07% to $0.7673. The Kiwi Dollar was up by 0.01% to $0.7199.

For the EUR

It’s a relatively quiet day ahead on the economic calendar.

German industrial production figures for December are due out ahead of the European open.

Following some dismal factory order figures, disappointing industrial production figures will weigh on the EUR.

Later tonight ECB President Lagarde is scheduled to speak. Expect any chatter on the economic outlook and monetary policy to also influence.

During the ECB Press Conference, Lagarde had taken a more cautious stance as a result of extending lockdown measures.

At the time of writing, the EUR was down by 0.08% to $1.2036.

For the Pound

It’s a quiet day ahead on the economic calendar. There are no material stats due out of the UK to provide the Pound with direction.

The lack of stats will leave the Pound in the hands of COVID-19 news updates and market risk sentiment on the day.

At the time of writing, the Pound was down by 0.04% to $1.3730.

Across the Pond

It’s a quiet day ahead on the economic calendar.

There are no material stats to provide the U.S Dollar with direction. The lack of stats leaves the market focus on Capitol Hill.

At the time of writing, the Dollar Spot Index was up by 0.05% to 91.089.

For the Loonie

It’s also a quiet day on the economic data front, with no material stats to provide the Loonie with direction.

The lack of stats will leave the Loonie in the hands of market risk sentiment on the day.

At the time of writing, the Loonie was down by 0.07% to C$1.2765 against the U.S Dollar.

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The upside momentum in EUR/USD run out of steam in the 1.2350 area earlier in the month. The subsequent corrective downside breached already the 1.2100 marks and appears to still have further legs to go. Despite the corrective downside, the outlook for EUR/USD remains constructive and appears supported by prospects of a strong recovery in the region (and abroad), which is in turn underpinned by extra fiscal stimulus by the Fed and the ECB. In addition, real interest rates continue to favor the euro area vs. the US, which is also another factor supporting the EUR along with the huge long positioning in the speculative community.

At the moment, the pair is losing 0.08% at 1.2064 and faces the next support at 1.2059 (2021 low Jan.18) seconded by 1.2058 (weekly low Dec.9) and finally 1.1976 (50% Fibo of the November-January rally). On the flip side, a break above 1.2349 (2021 high Jan.6) would target 1.2413 (monthly high Apr.17, 2018) en route to 1.2476 (monthly high Mar.27 2018).

The improvement in the sentiment surrounding the buck has not only tempered the rally in the pair but is has also cast doubts over the resumption of the uptrend at some point in the short-term.

On another front, further effervescence in the Italian political scenario is expected to slowly return to the markets after PM Conte’s Administration will face a confidence vote on Tuesday.

In the broader picture, the risk-associated space failed to pick up upside traction so far despite the better-than-forecast results from the Chinese docket earlier in the Asian trading hours.

In the euro docket, ECB’s Lagarde and Panetta will participate in the Eurogroup meeting later on Monday. Earlier, the final Italian CPI for the month of December showed consumer prices rose 0.2% MoM and contracted 0.2% YoY.

Nothing scheduled data wise across the pond as US markets will remain closed due to the Martin Luther King Day holiday

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The latest rejection above 1.23 is accompanied by losses in the Asian equities and the US stock futures. Major news agencies such as The New York Times are predicting a Democrat victory in Georgia elections. “Both Democrats remain heavily favored, despite their deficit in the tabulated vote. They’re favored to win the vote left to be counted by 9 to 10 points,” The New York Times’ Nate Kohn tweeted a few minutes ago.

A Democratic sweep will give the party control of the Senate and pave the way for President-elect Joe Biden to push through greater corporate regulation and higher taxes, and bigger fiscal stimulus.

Markets are currency focusing on prospects of greater corporate regulation and higher taxes, as evidenced by the stock market losses. EUR/USD may extend losses if the risk aversion worsens during European hours.

Data-wise, the focus will be on the German Consumer Price Index for December. The data due at 13:00 GMT is expected to show the cost of living rose 0.7% month-on-month in December versus November’s 1% drop. A bigger-than-expected rise is needed to help the pair establish a foothold above 1.23. The US FOMC minutes, due at 19:00 GMT, could also inject volatility into forex markets.

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It appears to have worked: credit spreads narrowed and market sentiment recovered. That this success came at the expense of the Greenback seems to make sense. First, the sheer size of the Fed’s effort exceeded that of other central banks. Second, that markets took this as credible buoyed sentiment and eased haven-seeking US Dollar demand.

This narrative may change as the calendar turns to 2021. While the pandemic continues, economic activity has begun a cautious recovery. It may sputter yet as case growth swells into the winter and a new wave of lockdowns disrupt commerce. Still, October saw the fastest manufacturing- and service-sector growth in over two years. The markets seem keen to believe that greener pastures are indeed ahead, spurred on by encouraging results for three competing Covid vaccines set to hit the market soon. A clear outcome to the US presidential election and a begrudging resignation to transferring power by the Trump administration have also helped soothe traders’ nerves.

A by-product of this optimism has been a shift away from dovish extremes on Fed policy bets, implying that the central bank may consider pulling back stimulus faster than previously thought. More of the same is likely if current trends bear out. Indeed, priced-in 2- to 5-year inflation expectations have already erased all of their Covid-linked plunges.

One major central bank unlikely to pace the Fed down this road is the ECB. Stubbornly sub-target price growth had the central bank flirting with exotic easing measures like negative interest rates well before the pandemic struck. The structural issues at play there are unlikely to have vanished.

A yawning gap between US and Eurozone breakeven rates underscores this, suggesting that the Euro may turn lower as the global monetary policy pendulum gradually retraces. Technically, early signs of topping may already be emerging at long-term trend resistance. A break back below 1.1880 may trigger an initial leg down toward the 1.16 figure.

EUR/USD MONTHLY CHART

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“The European Central Bank (ECB) announced a €500 billion expansion of its Pandemic Emergency Purchase Program (PEPP) as expected, but surprised by extending the program through March 2022. In parallel, the EU finalized the multi-year budget after a compromise with Poland and Hungary. Christine Lagarde, President of the ECB, said that the bank is monitoring the exchange rate, but did not offer starker language meant to push the euro lower. Her lack of urgency on the topic also allowed the common currency to rise.”

“EUR/USD needs to clear some clouds to continue the rise toward 1.22”

“The US Food and Drugs Administration recommended approving the Pfizer/BioNTech coronavirus vaccine. The American regulator is considered the global ‘gold standard’ and should accelerate injections worldwide.”

“Senate Majority Leader Mitch McConnel remains reluctant to give his blessing to new stimulus worth around $900 billion. Proposals from a bipartisan group of senators and the Treasury seem stuck in the mud. The safe-haven US dollar may gain further ground if the progress made earlier this week fully stalls.”

“EUR/USD needs to clear some clouds to continue the rise toward 1.22”

“The EU and the UK are preparing for a no-deal Brexit, and that is weighing on the euro. The bloc announced a contingency plan in case deliberations hit the Sunday deadline without a breakthrough. UK Prime Minister Boris Johnson said there is a ‘strong possibility’ of leaving on ‘Australian terms’ – a code for no accord.”

“Euro/dollar is set to move to the tune of talks in Brussels and Washington and also to watch US data. The University of Michigan’s Consumer Sentiment Index is set to edge down from 76.9 to 76.5 points in December.”

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“EUR/USD still targets the 1.2200 level.”

Next 1-3 weeks: “We have held a positive view in EUR since late last month. In our latest narrative from last Wednesday (02 Dec, spot at 1.2065), we highlighted that EUR ‘has moved into its next up-leg; the focus is at 1.2200’. EUR rose to a high of 1.2177 on Friday and shorter-term overbought conditions could lead to a few days of consolidation first. As long as 1.2040 (‘strong support’ level previously at 1.2010) is intact, there is still a chance for EUR to move to 1.2200.”

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