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  • EUR/USD was at the whim of US dollar flows on Thursday, but ultimately ended the day flat at just above 1.1800.
  • ECB rhetoric, as well as the minutes of the November meeting, serve as a reminder of the stimulus dilemma faced by the ECB in December.

EUR/USD was at the whim of US dollar flows on Thursday, undulating between fresh three-month highs at 1.1941 and lows of 1.1885, before settling around the midpoint of the day’s price action just above 1.1910 in recent trade.

The ECB’s dilemma…

ECB commentary in the form of rhetoric from Chief Economist Philip Lane and Governing Council Members Robert Holzmann and Gabriel Makhlouf, as well as the release of the minutes of the most recent ECB policy meeting, did have much of a lasting impact on the euro on Thursday.

Lane reiterated his support for the bank’s PEPP and TLTRO programmes, calling them the cornerstones of the EBC’s monetary response to the pandemic. Holzmann noted indications that there should be a more stable recovery from mid-2021 (seemingly a nod to growing expectations for mass vaccination programmes to have taken place by then) and pushed back against the notion of another rate cut, saying it “wouldn’t have an effect”. However, he did say that he cannot rule out the ECB implementing news monetary policy tools. Meanwhile, Macklouf noted that there may be factors pulling in “slightly different directions”.

In sum, though comments made by ECB members on Thursday did not reveal anything new, they do demonstrate the dilemma being faced by the bank ahead of its December monetary policy decision;

The ECB’s November monetary policy meeting statement and the comments made by ECB President Christine Lagarde in the post-meeting press conference clearly showed an ECB in favour of a significant expansion of stimulus measures in December. Back at the time of the November meeting, European nations were heading back into lockdown 2.0 to tackle a second Covid-19 wave and financial markets were feeling the strain. The minutes from this meeting were released on Thursday and served as a reminder of the pessimism being felt at the time.

Fast forward four weeks and while the immediate Covid-19 situation in Europe has not improved that much (most of Europe is still under some form of lockdown restriction and new infections are still at elevated levels), financial markets have been buoyed by 1) the prospect of the faster than expected development of more effective than expected Covid-19 vaccines and 2) Joe Biden’s US Presidential election victory over US President Donald Trump. These combined factors materially improve the global (and Eurozone) economic outlook for 2021 and beyond. Vaccine optimism in particular seems to already have given business a boost given the immediate reduction in long-term pandemic-related uncertainty.

Recent optimism clearly undermines the case for drastic stimulus measures in December. A deposit rate cut to -0.6%, already seen as unlikely back in November, is now almost certainly off the table. But markets still expect big things from the ECB regarding an expansion of the PEPP and TLTROs.

Does an ECB trying to balance a bleak near-term economic outlook with a more promising long-term outlook want to risk under-delivering on market expectations and risk sending EUR/USD even higher than it already is? The bank has already noted that a higher EUR/USD negatively impacts inflation in the Eurozone and the bloc has already been in deflation for the last few months.

On the topic of inflation in the Eurozone; French preliminary November inflation numbers are released on Friday morning at 07:45GMT and will, as ever, make for interesting reading. Elsewhere, there is also the ECB’s very own business and consumer sentiment survey for November, set to be released at 10:00GMT.

Friday also sees more ECB speak with governing council members Panetta, Weidmann and Visco speaking at a payments conference at 09:30GMT. As with recent ECB speak, they are likely to try to strike a balance between pessimism over the short-term outlook with improvements in the longer-term outlook.

EUR/USD carving out new range above last week’s range

EUR/USD appears to be carving out a new intra-day range, within which it is likely to continue to trade over the coming days, given the expected lack of volume with many US participants away on Friday and the coming Monday for a long Thanksgiving weekend.

The top of the range that was in play from the 16-24 November, that kept price action mostly confined between the 1.1800 and 1.1900 levels, seems to now be offering EUR/USD support. Buyers came in to buy the dip when EUR/USD dropped into the 1.1880s on Thursday, indicative that this area that had been acting as resistance has now turned to support. Going forward then, Thursday’s lows and the surrounding area are likely to continue to see buying interest.

To the upside, EUR/USD is now less constrained by resistance; Thursday’s highs (incidentally, the highest levels since early September) at 1.1941 will be the key level to watch to the upside. Beyond that, the 18 August high at 1.1961 is the next are to watch and above that the psychological 1.2000 mark and year-to-date high at 1.2010 just above it.

EUR/USD six-hour chart

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