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  • EUR/USD has seen significant upside in recent trade, rallying above the Monday high and the 1.2200 level.
  • EUR/USD has been focused predominantly on USD dynamics, rallying on USD weakness.
  • Fed members continued to push back on the notion that the bank’s bond programme will be eased any time soon.

EUR/USD has seen significant upside in recent trade, rallying above the Monday high and the 1.2200 level. The pair had previously been rangebound either side of the 1.2150 mark, before a broad weakening of the US dollar since the start of US trading hours that sent it to the bottom of the G10 performance table. EUR/USD currently trades just under 0.5% higher on the day or with gains of just under 60 pips. 

USD was unfazed by US data on Tuesday; the US NFIB Small Business Optimism Index was released at 11:00GMT and showed a 5.5 point drop to 95.9 in December. “Much of the decline stemmed from weakening outlooks for business conditions and sales in 2021” says Wells Fargo, adding that “renewed operating restrictions brought on by the resurgence in COVID cases is likely driving increasing pessimism. Business owners are concerned that stringent operating restrictions and weakening consumer spending will persist through at least the first half of this year”. Meanwhile, US JOLTs Job Openings for November showed a drop to 6.527M from 6.632M.

Meanwhile, on a day devoid of any notable Eurozone economic events, EUR/USD has been focused predominantly on USD dynamics. That also means that political instability in Italy, with the coalition government close to collapse over disagreements regarding the use of the many billions of euros the country will be receiving as part of the Eurozone Recovery Fund, is yet to have a significant impact on the EUR; if a snap election is called, market participants may fear further electoral gains for Eurosceptic parties such as the Five Star Movement and this could weigh on EUR.

Turnaround Tuesday sees dollar slide

It’s been a turnaround Tuesday for the US dollar, which is the worst-performing G10 currency and has now erased all of this week’s gains. The Dollar Index is only trading very slightly above the 90.00 level, having been as high as 90.70 on Monday.

Analysts had been chalking dollar gains since the start of the year (prior to Tuesday’s sell-off) to a combination of things including profit-taking on over-stretched short-positioning and rising US government bond yields as a result of the recent Democrat victory in Congress that very likely means that significant additional fiscal stimulus is on the way once the Biden administration gets into office. This in itself is argued to boost the US economic outlook which USD bulls have argued has a hawkish read across to the Fed; there is lots of chatter right now about when the Fed will ease.

As a reminder, going into the new year, analysts had been near-unanimous in their calls for a lower USD in 2021 on expectations that mass global vaccinations combined with unprecedented levels of global monetary and fiscal stimulus, as well as better global trade conditions under the incoming Biden administrations, would boost global growth to the benefit of risk assets and to the detriment in particular to safe-haven assets such as the US dollar.

The arguments presented above are still very much relevant and with the DXY rallying back to the north of the 90.00 level, many a USD bear might have seen this as a great opportunity to add shorts. Meanwhile, Fedspeaks over the last week or so seems to indicate a consensus line of thinking that it is still far to early to be thinking about tapering the bank’s asset purchase programme, which most see lasting at least for the rest of the year.

Indeed, FOMC members Eric Rosengren, Loretta Mester, James Bullard, Esther George, Raphael Bostic and Neil Kashkari all spoke today. On the topic of tapering the asset purchase programme, Rosengren said he thinks that purchases will continue at least through this year, Bullard said the bank is not close to bond tapering yet and Mester said it was premature to think we’re getting to the point to change our policy stance. The market’s main focus will be on a speech from the Chairman of the Federal Reserve Jerome Powell on Thursday at 17:30GMT. Most expect that he too will indicate that it is premature to be talking about tapering the bond purchase programme and just as FOMC commentary of Tuesday seemed to weigh on USD, there is a risk that such remarks could do the same on Thursday.

EUR/USD key levels