Euro Dented by Surging COVID-19 Threat

Dollar at 16-Month High, 

by Bogdan Giulvezan,

Growing anxiety in Europe over the effect of rising COVID-19 infections pushed EUR/USD to a 16-month low. The safe-haven status of the US Dollar but also retail sales numbers that exceeded expectations last week in the United States played an integral part in the massive drop.

Further strengthening the greenback, Fed officials Christopher Waller and Richard Clarida commented last Friday that an accelerated pace of the tapering may be beneficial, given the current economic landscape. This would also mean that the rate hike date, which is currently projected for mid-2022, would be brought closer.

On the other side of the pond, Austria became the first western European nation to re-impose a full lockdown, and the general opinion is that Germany may be next. This weighed on the Euro, further accelerating the drop for EUR/USD.

Key Events for the Week Ahead

Tuesday at 8:30 am GMT we take a look at the German Manufacturing and Services sectors with the release of two Purchasing Managers’ Indexes (PMI). Given the swelling of coronavirus infections in Europe, we may see a slowdown of these key sectors, which could add more stress on an already weak single currency. The forecast is a drop to 56.6 (previous 57.8) for the Manufacturing PMI and 51.4 (previous 52.4) for the Services PMI.

Wednesday will be a full day for the US Dollar, with the release of the Preliminary GDP (1:30 pm GMT), the Core PCE Index (3:00 pm GMT), and the FOMC Meeting Minutes later in the evening, at 7:00 pm GMT. The GDP is expected to show a reading of 2.2% (previous 2.0%) but the Preliminary version tends to have a lower impact than the Advance, which was already released.

The Core PCE (Personal Consumption Expenditures) Index is rumored to be the Fed’s favorite inflation measure but the CPI, which is released about 10 days earlier tends to steal some of the shine. The forecast for this week’s release is a 0.4% change, while the previous was 0.2%.

The Minutes contain details of the latest FOMC meeting and insights into the reasons that determined the latest interest rate vote but more importantly, the document may contain clues about the timing of the rate hike, in which case, the impact on the greenback will be huge.

Thursday and Friday, ECB President Lagarde will make two separate online appearances at the ECB Legal Conference 2021, which may trigger increased volatility on EUR pairs.

Technical Outlook – EUR/USD

The pair is currently trading at 1.1280 and has exited the long-term diagonal channel seen on the chart below. Even more, price has already returned to the channel and bounced lower immediately after touching it, thus confirming that the lower boundary is now a resistance level.

The pair is in free fall, with the USD bulls in almost complete control but it must be noted that the RSI is deep in oversold territory, which may spur some bullish movement in the form of pullbacks. The next support zone is located at 1.1175, while resistance is represented by the bearish trend line (lower border of the diagonal channel).