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  • EUR/USD ground to fresh monthly highs on Friday of above 1.1940, despite thin trading conditions amid lower than usual US participation in the market.
  • Broad USD weakness has been the driving factor, with other major USD crosses also moving to fresh highs of the day (AUD/USD and NZD/USD).

EUR/USD has been grinding higher on Friday, despite thin trading conditions in the absence of US many participants given Thanksgiving celebrations, and recently hit fresh monthly highs of above 1.1940. On the day, the cross trades with gains of nearly 30 pips, or over 0.2%.

USD bears return to the fore

The strength being seen in EUR/USD right not is much more a story of USD weakness than one of EUR strength; AUD/USD is at highs of the day and moving towards 0.7400, NZD/USD is at highs of the day and moving towards 0.7050 and USD/CAD is at lows of the day and gradually grinding lower since breaking back beneath the 1.3000 level. The only major currencies in the G10 that are being excluded from this rally vs USD are GBP (amid Brexit deadlock) and CHF.

Amid strength in the above-mentioned key constituents that make up the US dollar index (DXY), DXY is of course coming under pressure and is at fresh monthly lows in the 91.80s, eyeing up an imminent test of its yearly low at 91.74.

For many analysts and institutions, continued USD downside does not come as much of a surprise, given that many of the prevailing market narratives work directly against USD.

One of the key narratives that has lifted stock markets, commodity markets and risk-sensitive FX markets since the start of November has been the improving outlook for 2021 and beyond amid 1) good vaccine news (giving financial markets light at the end of the tunnel regarding the pandemic) and 2) Joe Biden’s victory in the US Presidential election, signalling a turning point for international relations towards more favourable global trade conditions.

However, many are also now citing near-term risk factors as weighing on USD. Credit Agricole attribute persistent USD downside to investors fretting “about the health of the US economy, which is still in the grip of a third Covid-19 wave”, and note that “the Fed’s October minutes have already hinted that the FOMC could adjust the pace of its QE programme if the economic outlook deteriorates further and given that the prospects for another fiscal stimulus package before year-end appear slim”.

Looking ahead to next week, Credit Agricole thinks that tier one US data releases for November (ISM manufacturing and services PMIs, Non-farm payrolls) “could determine whether the Fed will have to act again at its December policy meeting or not”. The implication is that bad data ought to be bad for USD (rather than what sometimes happens when USD rallies after bad US data on a safe haven bid), given that bad data implies a more dovish Fed. However, the bank suspects that “a lot of negatives are already in the price of the USD, so it would take significant US data disappointments to send the currency sharply lower”.

EUR/USD sets sights on 1.1950 and beyond

After hurdling resistance at the upper 1.1800s on Tuesday (the top of a previous range) and surpassing the former November high (set on 9 November) at 1.1920, EUR/USD appears to have cleared the way for a gradual grind higher back towards at least the 1.1950 level.

Beyond that lays the 18 August high at 1.1967, ahead of the psychological 1.2000 and annual high at just above 1.2010. With the DXY already at yearly lows, EUR/USD may be able to play catch up to some other USD major pairs which have already been pushing fresh highs on the year (such as NZD/USD).

To the downside, the 1.1900 level will continue to offer support, as it already has done in recent days and below that the main area to consider is the lower 1.1800s, which now also features the pair’s 21-day moving average at 1.1816.

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