EUR/USD has been boosted by USD weakness but has stalled around the 1.2100 mark. The reasons for the USD’s decline on Tuesday are unclear. But an improving Italian political situation is helping the euro. EUR/USD has been making the most of a further broad decline in the US dollar’s fortunes on Tuesday, though upwards momentum has stalled since the European morning and the pair is now consolidating around the 1.2100 level, which happens also to coincide with the pair’s 21-day moving average. On the day, the EUR/USD trades with gains of around 60 pips or around 0.5% and is one of the better G10 performers, only superseded on Tuesday by safe-haven currency duo CHF and JPY. The fact that these two safe-haven currencies are performing the best in the G10 on the day is a testament to the fact that the market mood is a little more cautious on Tuesday; stocks and crude oil markets are taking a breather following consecutive days of gains since the beginning of last week. Looking ahead for EUR/USD, ECB President Christine Lagarde and FOMC Chairman Jerome Powell will be speaking on Wednesday and both are expected to reiterate that their banks will maintain their current highly accommodative monetary stances. Much more interesting will be US Consumer Price Inflation numbers for January; will the US see a jump in prices (perhaps) as large as that seen in the Eurozone in January (unlikely)? A stronger than expected print could well feed into the risk asset positive “reflation” narrative and could hurt USD. Why is the US dollar dropping? So why is the safe-haven US dollar falling? It is impossible to give a definitive answer given that no specific theme or new story can be pointed at as causal to Tuesday’s price action. Perhaps the small reduction in the market’s USD short positioning seen over the last few days has come to an end and the shorts are piling back in again expecting a lower dollar in the coming weeks/months. Indeed, price action this week has given a sense of a return to “normality” (i.e. the USD consistently coming under pressure, as it did for most of the second half in 2020). Bearish USD arguments remain strong; as Fed officials continue to indicate that the bank’s ultra-accommodative stance is going nowhere any time soon, most expect real yields to stay low. The risk asset bullish narratives that more US fiscal stimulus is on the way and rapid vaccine rollouts will bring the pandemic under control, setting the stage for a powerful US and global economic recovery in the second half of the year is another bearish USD argument, if it is assumed that a reduced demand for havens will weigh on the world’s reserve currency, USD. If all the additional US stimulus translates into a Fed that needs to tighten sooner than expected in order to rain in a faster, more persistent rise in inflation than expected, then that could be a USD positive, however. Euro fundamentals Turning the euro fundamentals, things are positive amid further improvements in the Italian political situation; the Bund-BTP spread (a measure of perceived Italian government credit risk versus German government credit risk) dropped to its lowest levels since January 2016 and is well below 100bps at this point. Former ECB President Mario Draghi, who recently received a mandate from Italian President Sergio Mattarella to form a government, received conditional backing from the Italian parliament’s two largest parties over the weekend. More recently, the Leader of the Forza Italia Party, Silvio Berlusconi threw the party’s support behind Draghi. Markets are thus betting that the former ECB chief will be able to form a new government with a majority in parliament. Draghi is seen as a safe pair of hands and this, combined with his pro-European stance (he is said to want to push for a common Eurozone budget, the next step beyond the EU Recovery Fund which was funded by joint debt issuance), is being taken as a EUR positive. Elsewhere, the euro has broadly been unfazed by mixed tier 2 Eurozone data; Germany saw the release of stronger than expected trade numbers for December. The country’s trade surplus was a little larger than expected at EUR 16.1B, driven by a surprise expansion in exports, which were underpinned by strong demand for German-made goods from the US and China. Other sectors of the German economy almost certainly contracted in December amid the tightening of national lockdown restrictions to curb rising Covid-19 cases. Elsewhere, Italian Industrial Production for December was a little weaker than anticipated, with economic activity in the sector posting a surprise 0.2% MoM decline versus expectations for a 0.3% rise. FX Street FX Street FXStreet is the leading independent portal dedicated to the Foreign Exchange (Forex) market. It was launched in 2000 and the portal has always been proud of their unyielding commitment to provide objective and unbiased information, to enable their users to take better and more confident decisions. View All Post By FX Street FXStreet News share Read Next GBP/JPY Price Analysis: Bears in the drivers seat, 144.10 to come under pressure FX Street 2 years EUR/USD has been boosted by USD weakness but has stalled around the 1.2100 mark. The reasons for the USD’s decline on Tuesday are unclear. But an improving Italian political situation is helping the euro. EUR/USD has been making the most of a further broad decline in the US dollar’s fortunes on Tuesday, though upwards momentum has stalled since the European morning and the pair is now consolidating around the 1.2100 level, which happens also to coincide with the pair’s 21-day moving average. 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