The EURUSD pair rose 0.04% against the dollar to 1.1602 by the close on Friday, October 15. Gains in the pair were capped at 1.1620. Buyers came under pressure from a decline in the EURGBP cross pair amid statements by Pierre Wunsch and Christine Lagarde, then during the North American session after US retail sales came in stronger than expected.
ECB spokesman Pierre Wunsch called the growing price pressure in the Eurozone largely transitory. He said that the EU economy is on the right path but that policymakers have not yet reached their inflation target. There are unknown factors surrounding second-round inflation effects, while the ECB is quite flexible on stimulus.
Christine Lagarde also reiterates the same mantra almost every day, claiming that the spike in inflation is temporary. Earlier, FOMC members talked about transitory inflation, only because of the energy crisis, supply chain disruptions and labor shortages, but now they are inclined to believe that inflation will stay high for a long time.
The single currency saw only mild losses on Friday, drawing support from outperformance in stock indices. European equity markets posted the strongest weekly gains in seven months. The reporting season helped mitigate investor angst about higher inflation. The STOXX 600 index rose 0.7% on the day and ended the week 2.6% higher.
Sterling was on an upward trajectory, reaching 1.3775 for the first time since mid-September. The recovery in the UK currency was underpinned by rising risk appetite, the rally in major stock indices (robust quarterly earnings reports in the financial sector), as well as rising expectations that the BoE may be the first major central bank in the world to hike interest rates.
BoE Governor Andrew Bailey sent a new signal on Sunday that the UK central bank is preparing to raise interest rates for the first time since the start of the coronavirus crisis on the back of elevated inflation risks.
Today’s macro agenda (GMT+3)
12:30 US: Fed member Randal Quarles speech
16:15 US: manufacturing production (September)
17:00 US: NAHB housing market index (September)
17:30 Bank of Canada: business outlook survey
17:30 UK: BoE Deputy Governor for Financial Stability John Cunliffe speech
18:40 Canada: BoC Deputy Governor Timothy Lane
23:00 US: foreign bond investment (August)
On Monday morning, major currencies were showing mixed performance. The smallest losses were shown by the New Zealand kiwi on the back of support from Q3 inflation data.
Risk-sensitive assets are under pressure from weak macro data out of China and rising 10-year UST yields. In China, September retail sales and Q3 GDP fell short of the consensus forecasts.
Today’s economic calendar looks like a blank slate for the euro. Therefore, major currencies will be driven by the UST10 yield dynamic.
By the time of writing, the euro slipped to 1.1582. On the downward channel, support is located at 1.1575. The 45-degree angle crosses below the 1.1570 level. If price action remains above that mark, buyers will have the chance to move higher on Tuesday.
The worst-case scenario for buyers would be a retracement to 1.1530. In this case, the performance of the key pair will depend on the dynamics of the UST10 and the EURGBP pair. The cross on the daily TF broke through the key levels, so if it continues to head south, the EURUSD pair will be forced to trend lower.
Bottom line: the euro closed slightly higher against the US dollar on Friday. Right after the European opening, the euro came under pressure due to a plunge in the EURGBP cross. During the North American session, the dollar firmed amid strong retail sales and a widening UST10 yield. In today’s Asian trading, the euro has been trading in the red due to rising UST10 yields. Support is located in the range of 1.1570-1.1575. Buyers aim to hold the support level, while sellers are looking to push price action down to 1.1530.