- EUR/USD has been capped below the 1.11 handle as the US dollar bounces back to life.
- EUR/USD completes a 50% mean reversion of the Jan range.
EUR/USD is currently trading at 1.1041 having travelled between 1.2032 and 1.1064, reaching a fresh corrective low while the US dollar firms-up. There are less fears in markets over the coronavirus than the media portrays which is helping to lift sentiment, forcing the US 10-year yields higher, +5.50% a the time of writing for the day so far and trading back above 1.61%. The DXY also pierced 98 the figure, helping to drag the euro to fresh recovery lows.
While the media reports the coronavirus showing no signs of slowing, analysts at Danske Bank note that the “pace continues to slow, which is a good sign.” However, the US dollar continues to benefit from the uncertainty due to the deterioration in risk appetite to date, forcing the sell-off in EM currencies and keeping the majors in check, including the euro which cannot dig itself out from the eurozone’s economic woes.
Euro to be contained with core inflation running out of steam
The overall pace of the euro area economy, according to the PMI composite, remains lacklustre with the latest reading unchanged at 50.9 for December. However, manufacturing PMI jumped to 47.8 (a 9-month high) driven by an inflow of new orders and improved production expectations which is somewhat promising. On the other hand, Brexit negotiations could be a spanner in the works. Both the UK and the EU presented their initial objectives for the forthcoming trading negotiations yesterday, highlighting that the risk of a no-deal Brexit is still present. The downside risks to the euro, which has been somewhat immune to the Brexit concerns, could well be unveiled should negotiations take a turn for the worst. Moreover, the lack of confidence in the European Central Bank’s ability to achieve a lofty inflation target is likely a bearish factor for the foreseeable future – with underlying inflation dipping back to 1.1% from 1.3% in previous months. The gradual uptrend in core inflation is also running out of steam, heading back to its three-year average.