Euro Rise Likely Temporary, USD to Reassert Dominance But Watch for Powell Risk

[MongiIG]

Euro, USD Analysis and News

• Euro Rise Amid Positioning Squeeze Likely Temporary
• USD to Reassert Dominance But Watch for Powell’s Testimony

Euro Rise Amid Positioning Squeeze Likely Temporary

EUR: Quite the move in Friday’s holiday-thinned session with the Euro enjoying a brief reprieve as shorts were unwound on the back of renewed Covid concerns. The move was also akin to March 2020, where the Euro tracked rate differentials higher before the liquidity squeeze prompted inflows in the USD. Now for those wondering why the Euro rose on Friday against the USD, despite significant risk-off, here are a few reasons;

1. Market participants were heavily long Dollars, particularly against the Euro and Japanese Yen and therefore positioning is likely a large contributing factor.
2. USD buying had stepped up in the face of a more hawkish Fed and therefore with fresh Covid fears, this would likely undo some of those tightening bets and thus the USD would come under pressure.

In turn, the USD has not lost its safe-haven status and I suspect we are in a market where Euro traders will be looking to sell rallies in the currency. The key pivot at 1.1320-30, while resistance at 1.1370-1.1400 could see sellers step in. To add to this, price action this week will likely be headline-driven as markets await for authorities to assess the impact of the Omicron variant and thus, market sensitivity to economic data will likely ease off.

That being said, it will be important to keep a close on Powell’s testimony, and while a pre-recorded speech from Powell is due to be released at 20:05, I doubt this will touch on monetary policy and even if it did, given that it is a pre-recording, it could quite easily be dismissed as it would likely have been recorded before the recent Covid news. As such, the focus will be on whether Powell provides any dovish shifts in tomorrow’s testimony, which would likely put the USD on the back foot, however, given the current inflationary period, there is a limit to how dovish the Fed can go. Also worth noting, this will be the last time for Fed officials to speak before the blackout period ahead of the December monetary policy decision.

EUR/USD NOV 2021

Source: Refinitiv

EUR/USD FEB/MAR 2020

Source: Refinitiv

By Justin McQueen, Strategist, 29th November 2021. DailyFX