EURUSD not out of the woods despite a rebound

30 Nov 2021

After hitting a fresh 16-month low on Friday, the EURUSD rebounded to retest the 38.2 Fibonacci level on the daily chart. The US Dollar Index (DXY), which is a gauge for the strength of the greenback, jolted to a highest point since July 2020 before retracing to find support slightly above 96. EURUSD remains in a broad downtrend but volatility is expected in the coming days amid a heavy calendar week and the uncertainty around the new Covid-19 variant.

Omicron variant

Contrary to general expectations, the US dollar tumbled on Friday after news on the potentially more transmissible Omicron variant broke out. In times of fresh Covid-19 woes, the greenback tends to benefit due to its safe haven status which attracts higher demand when risk aversion hits the markets. The slide in the US dollar could be attributed to tapered expectations that the Fed will proceed with a hawkish stance, to reduce quantitative easing and introduce three rounds of interest rate hikes in 2022, in view of uncertainty on how the economy will be affected by the new variant. Moreover, US President Joe Biden also addressed the nation on Monday stating that no lockdown is needed for now, favouring risk assets.

Mounting inflationary pressures in the US

On 23^rd November 2021, the US Bureau of Economic Analysis reported that the Core Personal Consumption Expenditures for October has increased at 4.1% YoY. While this data is in line with market expectation, it is the highest reported figure in 31 years. Core PCE measures the average amount of money that consumers spend in a month, excluding seasonally volatile products like energy and food. The Core PCE inflation gauge is the Fed’s preferred measure in making monetary policy decisions. While the jury is still out on the impact of the Omicron variant on economic recovery, the rising inflationary pressures will continue to bolster the greenback.

ECB remarks

The dovish tone from the European Central Bank (ECB) was emphasized on Monday by governing council member Pablo Hernandez de Cos. He said that the ECB aims to avoid premature tightening of the monetary policy, reinforcing that the high inflation is caused by transitory factors. Additionally, the already worsening Covid-19 situation in the European region, prior to discovery of the Omicron variant, helped the EU policy makers to remain with their loose monetary policy.

Technical Analysis

After losing a 5-month long dynamic support on 15^th November, the EURUSD touched a new 16-month low last Wednesday before rebounding off the oversold Relative Strength Index (RSI). At the time of writing, the pair is changing hands at 1.13 with a bearish RSI of 39. The Moving Average Convergence Divergence (MACD) on the other hand is also displaying bearish momentum with the histogram in the negative region. In the short term, we believe that the pair could continue its rebound to a limited extent to test R1 before resuming the downtrend. A rejection of the RSI below the neutrality area of 50 would validate further decline in the EURUSD. The next downside target is set around 1.1168 (S1) which is the June 2020 low.

Tuesday, November 30

EUR – German Unemployment Change (Nov), Italy Gross Domestic Product, EU Consumer Price Index Core (YoY)(Nov), EU Consumer Price Index (YoY)(Nov)

USD – Housing Price Index (MoM)(Sep), Chicago Purchasing Managers’ Index (Nov), Consumer Confidence (Nov), Fed’s Chair Powell speech

Wednesday, December 1

USD – Fed’s Clarida speech, ADP Employment Change (Nov), Markit Manufacturing PMI (Nov), ISM Manufacturing PMI (Nov)

EUR – German Retail Sales (MoM)(YoY)(Oct), November Markit Manufacturing PMI for Spain, Italy, Germany

Thursday, December 2

USD – Fed’s Beige Book, Initial Jobless Claims (Nov 26)

EUR – Italy Unemployment (Oct), EU Unemployment Rate (Oct)

Friday, December 3

EUR – November Markit Services PMI for Spain, Italy, November Markit PMI Composite for Germany and EU, EU Retail Sales (MoM)(YoY)(Oct)

USD – Nonfarm Payrolls (Nov), Unemployment Rate(Nov), Markit PMI Composite (Nov), Markit Services PMI (Nov), Factory Orders (MoM)(Oct), ISM Services PMI (Nov)

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