Argued by some to be one of the most liquid currency pairs, the EURUSD is closely watched by traders around the world. Its dynamics influence the entire currency market – it is said that when the EURUSD is in a range, the entire currency market consolidates.
For months, the EURUSD consolidated between 1.10 and 1.08. It broke slightly above or below the two extremes, but with no follow-up. It all ended two weeks ago (nine trading days, more precisely), as the pair decisively broke higher, trading at 1.13 today. However could this be set to push for more?
What’s Behind the EURUSD Bullish Break?
To start with, there is increasing momentum behind the Next Generation EU fund announced a couple of weeks ago. With the UK out of the picture as a possible candidate to vote against the new debt deal, there is an increased likelihood that the Franco-German proposition of joint debt in Europe, will succeed.
We may not know how the debt deal eventually comes to fruition, but the markets bought the idea, and the EURUSD escaped higher. The move is particularly intriguing because the European Central Bank (ECB) has widened the QE program, and such a move (easing) should weaken the currency. Reflationary optimism appears to dominate the European landscape, and relative spreads lose their significance.
From a technical point of view, the EURUSD consolidated in a triangular pattern for most of 2020. It broke higher, acting as a reversal pattern, and now the price action keeps forming higher highs, common in a bullish trend.
There are already voices calling for 1.20 sooner rather than later, but a cautious tone is more appropriate. From a short-term perspective, this week’s Eurogroup meeting on Thursday may create a pause in the EURUSD bullish momentum. From a longer-term perspective, investors should remember that Germany takes over the EU presidency from July and six months forward.
For now, both fundamental and technical aspects favor a continuation of the bullish trend. However, more money printing from the ECB increases the long-term risks for the Euro.
Moving forward, the focus is more on the central banks’ actions rather than the technical aspects. The Fed on Wednesday will offer more clues about how it views the economy in the period ahead, and the USD side of the equation will weigh more in the EURUSD exchange rate this week.
If the market views the Fed as more dovish than the ECB, expect the EURUSD to continue its march higher.