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  • EUR/USD has reversed from earlier lows in the 1.2110s to trade back above 1.2150.
  • USD weakness as a result of a pick-up in risk appetite has driven the price action.
  • ECB sources suggest the bank is going to investigate USD weakness despite the stronger US economy.

EUR/USD has edged higher on what has proven to be a turnaround Tuesday for the US dollar, the pair trading as a function of the Dollar Index (DXY) which dropped Asia Pacific session highs above the 90.50 mark to lows under 90.20 by the start of US trade. EUR/USD has, thus, rallied from APac session lows of just above the 1.2100 level and pretty much bang on the pair’s 21-day moving average at 1.2107 and has rallied back to the north of the 1.2150 mark, up 0.2% or just over 20 pips on the day. US weakness is in line with a broad uptick in the market’s appetite for risk since the start of the EU session that has seen other FX havens (CHF and JPY) come under pressure and more risk-sensitive currencies (AUD, NZD and GBP) outperform.

Driving the day

Tuesday’s uptick in risk appetite appears to have been driven by a positive shift in the tone of the newsflow on the Covid-19 front; namely, Moderna and Pfizer announced that they are looking into Covid-19 booster shots (another shot to come a few months to a year after the initial two shots) that would specifically be targeted at maintaining/building immunity to variants of the virus such as that discovered in South Africa a few weeks ago. Meanwhile, the CFO of Johnson & Johnson (J&J) said earlier in the day that they expect to release Covid-19 vaccine trial data next week and that the company is very optimistic that they will be releasing a very robust data set. J&J’s vaccine is being touted as a “game-changer” in the vaccination race as it would only require one shot to acquire full immunity.

US Consumer Confidence data for January, released at 15:00GMT, was broadly ignored. The Conference Board’s survey showed a slightly improvement in sentiment in January, in fitting with stronger than expected Manufacturing and Services PMI surveys released at the end of last week. The headline Confidence Index rose to 89.3 from 87.1 in December and, though the Present Situation Index dropped to 84.4 from 87.2, the Expectations Index drose to 92.5 from 87.0. In an early indicator as to the health of the US labour market in January, the Jobs Hard-to-get Index rose to 23.8 from 22.9, pointing to the risk of another negative monthly payrolls print.  

The ECB has also been a theme today, though has not moved markets; Bank of France Governor and ECB governing council member François Villeroy de Galhau reiterated the bank’s commitment to its ultra-accomodative stance and readiness to use all the “power” of all of its policy instruments, including the Pandemic Emergency Purchase Programme (the bank’s Covid-19 crisis QE package). Moreover, Villeroy de Galhau said that the ECB is carefully monitoring the implications of the exchange on the inflation outlook.

Elsewhere, ECB sources cited by Reuters said that the bank is looking into the reasons as to why the US dollar has weakened despite a stronger economic resilience to the Covid-19 pandemic in the US. The bank is reportedly going to look into the impact of relative Fed vs ECB monetary policy stances on the exchange rate.

Of course, anyone who has followed/working in FX markets for more than a few months could easily explain why USD has weakened in recent months versus the euro, despite better economic performance; 1) the Fed has printed significantly more money than the ECB and has thus much more rapidly expanded the money supply of the USD versus the euro (one only needs to look at the rise in the Fed’s balance sheet versus the rise in the ECB’s), 2) prior to the pandemic, USD held a substantial rate advantage over the euro but thanks to the Fed cutting interest rates to zero and all the stimulus boosting US inflation expectations to multi-year highs, US real rates have dropped well below that in the EU, eroding the USD’s relative attractiveness, 3) optimism over the vaccine driven global economic recovery in 2021 and beyond, as well as better global trade conditions under the Biden administration, weakens demand for safe-haven currencies like the US dollar (including versus the euro).

A substantial pricing out of Eurozone “breakup” risk has also aided the euro relative to its US counterpart since the EU took a big step towards fiscal union when it agreed on the EU Recovery Fund (which will be funded by joint EU debt).