EUR/USD consolidates above 1.2100 as weekend approaches

• After an eventful few days, EUR/USD is consolidating just above the 1.2100 level as traders exit for the weekend.
• A combination US dollar strength and dovish ECB speak saw EUR/USD slip from earlier highs above 1.2150.

EUR/USD has been moving sideways in recent trade between the 1.2100 and the 1.2120ish levels, amid a quiet end to what has been a busy week. EUR/USD moves have been quite contained on the week however, with the pair trading within only about a 100-pip range between the 1.2060 to 1.2160is levels. Compare that the GBP/USD’s near 350 pip range! Heading into the Friday FX close at 22:00GMT, EUR/USD trades with losses of around 20 pips or just under 0.2%.

EUR/USD ends week on the back foot due to…

A combination of USD strength and dovish ECB speak early in Friday’s European trading session are behind the small drop seen in EUR/USD on Friday. USD is higher primarily as a result of a greater demand for safe haven assets on Friday given uncertainties on the US fiscal stimulus and Brexit fronts. Indeed, USD saw upside during the early part of the European session in tandem with upside in bonds and downside in risk assets such as equities and crude oil markets.

Selling in EUR/USD was exacerbated at the time, however, by dovish commentary from European Central Bank Governing Council Member François Villeroy de Galhau; he noted that the ECB could extend the PEPP further if needed and, on the exchange rate, the ECB would be “vigilant” and all instruments are available on this. This was stronger language on EUR than that employed by ECB President Christine Lagarde on Thursday during the post ECB rate decision press conference.

As a reminder, the ECB held interest rates but expanded its PEPP and TLTRO programmes by nine months with the aim of keeping financial conditions as easy as they currently are until the Eurozone economy can begin its proper post-Covid-19 recovery from the second half of 2021 (when it is hoped the EU will have herd immunity against the virus). The main focus of the meeting, however, was not about what stimulus would be unveiled, but what the ECB’s stance on recent appreciation of EUR would be given recent appreciation (particularly of the EUR/USD pair). However, the ECB statement, nor Lagarde in the press conference did not toughen up their language on the EUR, instead reiterating that they will continue to monitor developments in the exchange rate and noting that recent appreciation put downwards pressure on Eurozone price growth.

Looking ahead for EUR; flash December Markit Manufacturing PMI numbers out on Wednesday will be the most important to watch, with a big drop in activity expected given recent lockdowns. German IFO numbers for December next Friday will also be worth noting.