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  • EUR/USD has been gradually picking up in recent trade and is just below post-ECB highs around 1.2170.
  • Focus will be on flash January PMI data on Friday.

EUR/USD has been gradually picking up in recent trade as a function of USD weakness being seen across other G10/USD pairs as well. The pair has recently clawed its way back into the 1.2160s and is eyeing a retest of the 1.2173 highs set earlier in the session as ECB President Christine Lagarde addressed the media in the post-ECB monetary policy decision presser.

Ahead of the close of US trading hours, EUR/USD is trading with decent gains of roughly 0.5% or around 60 pips, buoyed by a slightly more hawkish than an expected outcome to Thursday’s ECB event; whilst the ECB held its policy-setting steady as expected, Lagarde came across as a little more upbeat on the bloc’s economic prospects during the press conference and in the bank’s monetary policy statement a line was included hinting that the bank might not use the entirety of its EUR 1.85T PEPP envelope.

Driving the day

EUR/USD had been on the front foot even prior to Thursday’s ECB meeting. The French Business Survey for January, released prior to the open of European trade, came in at 98, above expectations for 94. The improvement was driven by an increase in business climate and wholesale trade; “in both sectors, the business climate reached its highest level since March, a sign of an almost uninterrupted recovery of the economic situation since the April lockdown” note, ING, adding that “the November lockdown, which mainly affected the service and retail sectors, had almost no impact on the steady improvement in business sentiment in industry and wholesale trade.”

However, the outlook for the French economy in the coming months increasingly hinges upon the path of the pandemic, and the spread of the more transmissible British variant of the virus is increasing pessimism. ING observes that “across the country, hospital officials are beginning to publicly consider the possibility of a third lockdown to curb a situation that could be out of control by mid-February, similar to what happened in England and Ireland in December” and that “if the government prefers to wait and see how the situation develops, it may be forced to take drastic decisions quickly”.

If France does go into a tighter lockdown, it would be joining Germany and the Netherlands, who both also recently announced tougher measures. This could weigh on EUR. Meanwhile, if the rollout of vaccines on the continent continues to lag that of the UK, US and other economies, this could also be a bearish factor for the currency to contend with.

Looking ahead, focus will be on flash PMI numbers for this month out of France, Germany and the Eurozone as a whole. Service sector PMIs are expected to remain in contractionary territory (i.e. below 50) given lockdowns and the rampant spread of the virus. Manufacturing is expected to remain the bright spot, with PMIs likely to remain well in expansionary territory.

EUR/USD key levels