Where we are: EUR/USD is currently trading at 1.1745, up 0.31% on the session, after printing a day range of 1.1705-1.1755. The pair has recouped some of last week’s losses, finding support near the 1.17 level. This bounce coincides with a broader weakening of the US Dollar, as the DXY trades down -0.29% to 98.14.
What’s driving it: The primary driver is the broad USD weakness, reflected in the DXY decline. This appears linked to receding concerns about imminent aggressive Fed tightening, evidenced by the stability in US real yields. Simultaneously, the ECB’s survey pointing to a lack of second-round inflation effects has capped Euro upside, with the market factoring in a wait-and-see approach from the ECB on Thursday. The US-German 10-year yield spread sits at +130bp.
- Reuters wire noting the ECB survey showed scant signs of second round inflation effects.
- The FT reporting China warning the EU over the ‘Made in Europe’ law.
- EUR net non-commercial positioning remains modestly long but at the 10th percentile, leaving room for further build.
NY session focus: Expect volatility around the US data releases this morning, but the focus will quickly shift towards end-of-day flows. Watch for a break above 1.1755 to target 1.1800. Below, a retest of 1.1700 is likely. The EUR/USD trade continues to be dominated by swings in the DXY, making DXY levels critical indicators. The pain trade for EUR would be a resurgence in USD strength fueled by hawkish Fed commentary or geopolitical escalation.