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The sharp and sudden fall in euro area real yields following the unexpectedly high January inflation print is contributing to the latest bout of euro weakness and technical developments indicate the weakness in EUR/USD could run further in coming weeks. However, economists at ANZ Bank think the move is corrective as positive drivers for the euro will resurface as the business cycle improves.

Key quotes

“The break of the uptrend in EUR/USD highlights the vulnerability to further near-term weakness, with key support in the 1.1800/50 area.”

“In the near-term, euro weakness may run further as January’s exceptionally high core inflation print (1.4% YoY, the highest in five years) has helped to push real yields down. The slow rollout of the vaccine program across the European Union is also weighing on sentiment.”

“Our business cycle analysis implies that euro weakness should prove temporary and that the move is corrective in nature. The slow start to vaccinations will correct as serum production improves. The net effect will be to push recovery in aggregate demand into late spring and summer rather than Q1. Whilst that delay to the anticipated rebound is frustrating, positive cyclical developments will re-emerge to support the euro as 2021 progresses.”