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  • EUR/USD is consolidating at two and a half year highs around 1.2050, up more than 100 pips on the day.
  • ECB Chief Economist Lane might use tomorrow’s speech as an opportunity to “jawbone” the currency lower.

EUR/USD is stabilising close to highs of the day around 1.2050, the pair having rallied roughly a stunning 1.0% on the day, or more than 100 pips.

EUR rally to test ECB nerves

The Euro’s rally on Tuesday came in spite of preliminary Core Consumer Price Inflation pointing to a third consecutive month of deflation. Tuesday’s downbeat European morning session sets in stone expectations for easing from the ECB later on this month. Indeed, ECB President Christine Lagarde reiterated that the ECB will be “recalibrating” some of its tools to support the economy in December and noted how the second Covid-19 wave is beginning to hurt the Eurozone economy.

Comments from ECB Governing Council Member Isabel Schnabel shed light on what the ECB will actually do in December; Schnabel warned against hopes for “blockbuster stimulus” (i.e. a strong hint there will be no rate cut) and said that the ECB is looking to lengthen the duration of stimulus, rather than make financial conditions even more favourable than they are right now. Schnabel said that a 12-month extension to the PEPP is one option being considered, as could extensions to the TLTRO programme.

A scaling back of expectations for an immediate easing of financial conditions based on Schnabel’s comments could arguably have fed into EUR’s rally on Tuesday. FX markets certainly seem in the mood to test the ECB’s “jawboning” reaction function; over the summer, ECB Chief Economist Phillip Lane spoke about the negative effects of rapid EUR appreciation when EUR/USD has rallied above 1.2000. Lane will be speaking again tomorrow, and the ECB’s Chief Economist might use this opportunity to try to take some of the wind out of EUR/USD’s sails.

More broadly, FX markets just seem to want to be short USD right now. Strength in US equities on hopes that momentum towards another US fiscal stimulus package is one factor weighing on the safe-haven USD, as well as the ongoing themes of the dovish Fed (markets hope for action in December) and hopes for a better 2021 and beyond given vaccines and better global trading conditions under the incoming Biden administration.

EUR/USD in open air

With EUR/USD back at more than two and a half year highs, the pair is currently sat in the middle of open air, technically speaking. The most notable levels of support to the downside are the previous September highs around 1.2011 and then Monday’s 1.2004 high just above the psychological 1.2000 level. To the upside, resistance in the form of the October 2017 high resides at 1.2093 and above the psychological 1.2100 level, the March 2018 lows at 1.2154.

EUR/USD weekly chart