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EUR/USD in stasis even as ECB sources downplay rate cut odds

  • EUR/USD in a holding pattern despite the ECB downplaying rate cut odds. 
  • The central bank looks to be walking back on its recent dovish talk. 
  • Seasonality favors strength in the US dollar in February. 

EUR/USD struggles to gather upside traction despite the European Central Bank (ECB) walking back on its recent attempts to jawbone the single currency. 

On Friday, Reuters quoted five sources as saying that the central bank is unlikely to reduce its already-record low policy rate to counter the coronavirus-induced slowdown, as it would have a limited impact on the economy. Besides, the euro’s exchange rate is still within its historical range, despite having rallied by 14% against the dollar since March. 

The markets were caught off guard last week after Dutch central bank’s governor Klaas Knot signaled scope for a deeper cut in the Deposit Facility Rate, currently at minus 0.5%. 

However, while the central bank seems to have backed off from its dovish messaging, the EUR bulls remain elusive. EUR/USD is trading largely unchanged on the day near 1.2130, having faced rejection above 1.2150 on Friday. 

Bank of America Global Research sees scope for a downside correction over the coming weeks. “The EU economy is weak and is weakening further. The lockdown continues, and vaccination has been disappointingly slow,” the bank noted. 

Seasonality also favors a pullback in EUR/USD. According to Credit Agricole CIB Research, the USD tends to do well on average in February, with historic gains particularly pronounced when they followed broad losses in January. 

Data-wise, the focus today is on the German Retail Sales, Manufacturing PMI, and the US ISM Non-Manufacturing figure. 

Technical levels

 

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