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  • EUR/USD is a little higher on the day but has failed to reclaim the 1.1800 level.
  • While EU and US data was largely ignored, the market’s more risk on tone seems to have weighed on USD.

EUR/USD, though trading with modest gains on the day, continues to struggle to break above the 1.1800 level and, in recent trade, has dropped back into the 1.1780s again. With the weekend fast approaching and FX volumes dropping off, a break above this level of resistance in the near future seems unlikely, as does the prospect of EUR/USD breaking out to the downside again underneath this week’s lows in the 1.1760s. Trade is likely to gain some direction again at the start of next week as FX markets contend with month and quarter-end rebalancing flows.

Driving the day

Just as strong PMI data earlier in the week did, Friday morning’s stronger than expected German IFO survey has failed to inject much by way of recovery impetus into the euro on Friday. Similarly, US Core PCE inflation and Personal Income & Spending data for the month of February did not reveal anything too surprising (inflation is was still soft, but is still expected to pick up in the coming months, while income and spending dropped as the boost from the January stimulus cheque wore off and amid bad weather) and as a result, did not move EUR/USD at all.

EUR/USD’s modest recovery seems to owe itself to more to upward momentum in the USD taking a bit of a breather; USD had been pressing on towards fresh annual highs over the last few days (just like EUR/USD has been plowing fresh annual lows), but the Dollar Index (DXY) has run into a bit of profit-taking activity ahead of the 93.00 level.

Elsewhere, some market commentators are already citing month-end flows as a factor weighing on the buck. More likely is the fact that Thursday’s relatively risk on bias (with gains being seen in global equity, commodity and risk-sensitive currency markets) is weighing on demand for safe-haven currencies, hence why safe-haven JPY is performing so poorly on the day (the yen is down nearly 0.5% versus the buck, and its losses versus the euro are closer to 0.7%).

The coming week

Over the last few weeks, the major news regarding Covid-19 has been to do with much of mainland Europe being hit by a third wave (that is being driven by the more-transmissible UK variant of the virus) and the fact that most EU countries are going back into lockdown. While this news has not devasted the euro against all of its G10 counterparts, it has contributed to the narrative of “American exceptionalism”; i.e. the idea that given the better vaccine rollout and larger fiscal stimulus in the US, the country’s economic recovery is going to outperform much of the rest of the worlds, including that of the Eurozone, with hawkish implications for Fed policy (versus the likes of the ECB anyway) – this has been a USD and US government bond yield positive story. But there are early signs of the Covid-19 infection rate picking up in the US; the 7-day moving average of new cases is up over 7% on the week – this is a trend to watch next week, as a third wave in the US could catch some by surprise.

Aside from the pandemic, there will also be plenty of data to keep track of; preliminary March Eurozone PMIs are out next Wednesday, while the main events in the US are March ISM Manufacturing PMI on Thursday and the official March jobs report on Friday.