EUR/USD held up well on Monday despite the market’s deeply risk-off tone, with the pair finding good dip-buying interest when it hit the 1.1300 level earlier in the session and recovering to trade flat on the day in the 1.1320s. Unlike other G10/USD pairs (like AUD/USD and NZD/USD), EUR/USD continues to hold above an uptrend that has supported it since late November/early December. As has been the case for the past four sessions, the price action continues, for the most part, to stick between the 21 and 50-day moving averages at 1.1345 and 1.1315 respectively.
The euro’s defensive qualities as a funding currency seemed to win through on Monday, but FX strategists have warned that the Eurozone is highly vulnerable to a NATO/Ukraine/Russia conflict if it results in further sharp upside in European gas prices. Some have suggested it would make sense for an element of “risk premia” to be priced into the euro as the risk of military conflict rises. That is something traders should be on the lookout for this week and, when combined with expectations for a hawkish Fed meeting on Wednesday and the risk that further risk-off flows continue to benefit the safe-haven US dollar, suggests downside risks for EUR/USD. Traders should watch out for any possible bearish breakout towards the mid/low 1.1200s.
Data appears to be taking more of a backseat as a driver of the price action. Mixed flash Eurozone PMIs for January out in the European morning, where manufacturing held up much better than forecast but services were weak, hardly had an impact on the euro. Equally, a big miss on expectations for the US flash Services PMI, which fell to its lowest since July 2020 and nearly back into contractionary territory (i.e. under 50) didn’t seem to phase the buck much. The main data to watch this week for EUR/USD traders is US GDP on Thursday and some of the individual Eurozone nations (Spain, France and Germany) and US December Core PCE inflation on Friday.
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