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Euro Bounces Back as US Dollar Pauses on Yield Dip. Will EU Inflation Ignite the ECB?


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EURO, EUR/USD, Crude Oil, US Dollar, PBOC, Iron Ore, AUD/USD - Talking Points

  • Euro tracked slightly higher with the US Dollar pausing on lower yields
  • APAC equities move higher thanks to easing from the PBOC
  • With Treasury yields easing, will EUR/USD find some support?
News updates from October 28: ECB to keep buying bonds, US GDP growth  slowed in the third quarter, Apple and Amazon miss revenue forecasts |  Financial Times

The Euro pared back some of the losses of the week as the US Dollar was weaker across the board with US Treasury yields drifting lower after an astonishing run up of late.

After trading as high as 1.902% yesterday, the 10-year note has pulled back to be near 1.86 in Asia. The 2-year note went up to 1.076% and it is only a basis point or so from there now.

Other G-10 bond yields have generally been headed north as well. Most notably, the 10-year German government bond, the Bund, nominally yielded more than 0% yesterday for the first time since May 2019. It has since dipped below zero again.

The inflation data for the Euro-zone later today might provide an impetus for the ECB to change course on monetary policy.

Despite lofty Treasury yields, the US Dollar index (DXY) lost ground yesterday and has continued doing so today.

GBP/USD continues to firm after yesterday’s inflation beat of 5.4% year-on-year raised rate hike expectations for the Bank of England.

The strength in the Sterling has seen EUR/GBP dip to 0.8313. It is approaching the December 2019 low of 0.8270 and a breach of it would see the cross rate at its lowest since July 2016.

Crude oil pulled back from its overnight high of $86.79 bbl today as supply from Iraq to Turkey was re-installed.

The main Wall Street indices were down around 1% in their cash session but are trading in the green in afterhours via futures, thanks to the PBOC easing policy further today.

APAC equities have had a stellar day as a result of the Chinese central bank lowering the 5-year loan prime rate (LPR) by 5 basis points to 4.6% and the 1-year LPR 10 basis points lower to 3.7%. Tech stocks were the big gainers, with with the Hang Seng Tech index up over 3%.

Iron ore rallied on the PBOC news and the Australian unemployment numbers were better than expected.

Jobs added was in-line with forecast of 60k, but the rate of unemployment fell to 4.2% instead of 4.5% expected. The misalignment comes from the fact that 2 independently different sources of data are used in the calculations of each.

Despite all this, AUD/USD was unable to hold above 0.7250.

In other news, US President Joe Biden was active on the wires. He passed the buck on inflation management to the Fed. He also said that he doesn’t think Russia will launch a full-scale invasion of the Ukraine. His reasoning was that the consequences would be too severe for them.

Ahead in the US session, there’s jobs numbers and home sales data to watch out for.

 

EUR/USD TECHNICAL ANALYSIS

EUR/USD has bounced off the 34-day simple moving average (SMA) in the 2 sessions prior to today it may continue to provide support, currently at 1.13252.

Further below, support could be at the previous lows of 1.12724, 1.12347, 1.12219 and 1.11861.

On the topside, resistance might be at the previous highs and pivot points of 1.1383, 1.13865, 1.14830, 1.15133, 1.15245 and 1.16922.

Euro Bounces Back as US Dollar Pauses on Yield Dip. Will EU Inflation Ignite the ECB?

Chart created in TradingView

 

Written by Daniel McCarthy, Strategist for DailyFX.com. 20th Jan 2022.

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ECB's Lagarde: Inflation drivers will ease gradually in 2022

Reuters.pngEconomyJan 20, 2022 
 
 
 
ECB's Lagarde: Inflation drivers will ease gradually in 2022© Reuters. FIL PHOTO: European Central Bank President Christine Lagarde addresses the European Parliament during a debate on the 2018 annual report of the ECB in Strasbourg, France, February 11, 2020. REUTERS/Vincent Kessler

PARIS (Reuters) - Inflation in the euro zone will decrease gradually over the year as its main drivers, such as surging energy prices and supply bottlenecks, are expected to ease, European Central Bank (ECB) head Christine Lagarde told France Inter radio.

"This will stabilise and ease gradually in the course of 2022," she said.

Asked on her policy to counter price pressures, Lagarde reiterated that the ECB did not need to act as boldly as the U.S. Federal Reserve because of a different economic situation.

"The cycle of the economic recovery in the U.S. is ahead of that in Europe. We thus have every reason not to act as rapidly and as brutally that one can imagine the Fed would do," she said, adding that inflation, too, was higher in the U.S.

"But we have started to react and we obviously are standing ready, to react by monetary policy measures if the figures, the data, the facts demand it," she said.

 

In the interview, Lagarde also commented on recent trends in euro zone yields as Germany's 10-year Bund, viewed as the primary benchmark, rose above 0% for the first time since 2019.

"If the yields rise again, this means that the fundamentals of the economy are improving", Lagarde said.

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