Strong Rebound in EURUSD Amid Weaker US Dollar

20 Oct 2021

EURUSD has staged a strong rebound after testing the dynamic support of a falling wedge. The pair is recovering from its 15-month low due to the weakening US dollar amid the risk-on mood in the market. The US Dollar Index (DXY) which measures the greenback’s strength against a basket of rival currencies dipped to the lowest point since 28 September. A 5-day losing streak has sent the index from the monthly high of 94.56 to hover around 93.75. The rise in the EURUSD can be attributed to the several factors.

Improved Risk Sentiment

Following the strong performance in the equities market this week, risk sentiment has improved. The market risk-on mood hurt the US dollar as the safe haven currency tends to benefit at times of market risk aversion. The fears around a contagion from China’s Evergrande’s debt trouble is waning after news that the group has paid an onshore bond coupon due on Tuesday. In addition, investors confidence was buoyed by the Chinese policymaker’s remarks that the Evergrande situation is under control.

Downbeat Production Figures

On Monday, the release of two bearish US production figures helped the pair edge higher. The September Industrial Production released by the Board of Governors of the Federal Reserve pointed that the volume of production of US industries, such as factories and manufacturing, reduced by 1.3%, as opposed to the market consensus of a 0.2% increase. An uptrend in this figure is regarded as inflationary. As the figure underperformed market expectations for the 2^nd consecutive month, market expectations around a hawkish Fed policy was tempered.

Another data that gauges inflationary pressure in the US is the Capacity Utilization released by the Federal Reserve Board. Capacity Utilization tells us the percentage of the US production capacity used over a specific period. This data, indicates the overall demand and growth in the US economy, fell short of the market forecast of 76.5%, printing only 75.2% for the month of September.

Dovish ECB

Despite the short term rally, the difference in the tone of monetary policy between the US and European Union Central Bankers remains a threat for the pair in the medium to long term.

At a lecture at IMF on Saturday, European Central Bank (ECB)’s President Christine Lagarde mentioned that the “inflation is largely transitory”. She mentioned that the impact of the temporary factors driving prices, should fade out of annual rates of price changes in the course of next year, dampening annual inflation. “So far, there is no evidence of significant second-round effects through wages and inflation expectations in the euro area remain anchored, but we continue to monitor risks to the inflation outlook carefully,” she added.

Furthermore, ECB’s Governing Council member and Bank of France Head Francois Villeroy said on Tuesday that there is no reason that the ECB should increase rates between now and the end of next year, further cementing the dovish tone of the ECB.

Technical Analysis

EURUSD is captured in a falling wedge that stretches back to May. At the time of analysis, the technical setup of the pair is turning bullish. The RSI which stayed below the neutrality line of 50 since mid-September is now testing the level again. A break above the 50 line may signal further upside to follow. While the MACD is still bearish in the negative region, it is seen to gradually approach the base line at zero.

Looking ahead, we hold the view that the pair will be met with resistance at the top band of the falling wedge. If the pair manages to advance above the dynamic resistance, it will be headed to test 1.1755. In the event that the pair heads south from here, the 20 SMA and lower band of falling wedge would serve as support.

Key events to watch in the coming week:

Wednesday, October 20

USD – Fed’s Bowman speech, Fed’s Waller speech

EUR – ECB’s Elderson speech, Consumer Price Index (MoM)(Sep), Consumer Price Index – Core (YoY)(Sep), Consumer Price Index – Core (MoM)(Sep), Germany 10-y Bond Auction

Thursday, October 21

USD – Fed’s Quarles speech, Fed’s Beige Book, Philadelphia Fed Manufacturing Survey (Oct), Initial Jobless Claims (Oct 15), Initial Jobless Claims 4-week average (Oct 15)

EUR – European Council Meeting, Consumer Confidence (Oct)

Friday, October 22

EUR – France Gross Domestic Product (QoQ)(Q3), Germany Markit Manufacturing PMI (Oct), Germany Markit PMI Composite (Oct), EU Markit PMI Composite (Oct)

USD – Markit Manufacturing PMI (Oct), Markit Services PMI (Oct), Markit PMI Composite (Oct)

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