How much can EUR rise?

EUR resumed its rise against the USD after the European Central Bank (ECB) boosted asset purchases on Thursday. Having announced their plans to ease as far back as October, the decision was widely anticipated. Analysts have argued that unless ECB actions were more aggressive, EUR/USD could see a post ECB rally.

EUR/USD traded higher but its gains were modest, reflecting the currency’s overstretched move. The central bank increased its Pandemic Emergency Purchase Program by US$500 billion, right in the middle of the market’s estimate. The central bank also extended the program to March 2022 from middle of 2021.

Most market watchers were looking for an extension to end of 2021 and may be 2022. It also lowered growth forecast for 2021 but raised forecasts for 2020 and 2022. On inflation ECB cut projections for this year and 2022. These small but important adjustments tell us that the ECB on balance is less pessimistic, but still plan to keep monetary policy easy for a very long time. This is especially true with ECB President Lagarde’s comment that they may not need to use the entire PEPP envelope.

EUR/USD snapped a 4 day decline to trade as high as 1.2159, just under the 50% Fibonacci retracement of the May 2014 to January 2017 decline. If it breaks above 1.2170 the next stop could be the April high of 1.2414. Between some ECB optimism, mostly better data, declining virus cases and broad based US dollar weakness, EUR/USD has fundamental support for further gains.

Meanwhile investors continued to sell USD as weekly jobless claims surge to 853,000. This is the highest level since September 19th and reflects the effects of recent lockdowns. Consumer prices rose 0.2%, which was more than expected but as we noted, inflation is very low and a small uptick won’t affect Federal Reserve policy. Producer prices and the University of Michigan consumer sentiment index are due for release tomorrow.  The rise in virus cases could dampen sentiment but any declines may be small considering positive vaccine news.

GBP sold off sharply after the dinner between UK Prime Minister Johnson and European Commission President Von der Leyen ended with no meaningful developments.  Both sides will continue to talk over the weekend but everyone is preparing for a no-deal Brexit. Johnson said on Thursday there’s a strong possibility negotiations will fail as the European Union prepares for similar contingencies. There’s still hope that a deal can be made before the end of the year but it is fading by the day.

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