EUR/USD eases below 1.1600 after rejection at 1.1620

• Euro recovery attempt remains capped below 1.1600. 
• The common currency fails to take advantage of USD weakness.
• EUR/USD is expected to extend its decline towards 1.1100 – Scotiabank.

The euro keeps treading water on both sides of the 1.1600 level, unable to take advantage of a weaker US dollar. The common currency bounced up from year-to-date lows at 1.1520 earlier this week but is missing follow-through to post a significant recovery and remains hesitating between 1.1580 and 1.1620 for the second day in a row.

The euro inched up as the USD loses steam

The euro is set to close the week with gains, to put an end to a four-week decline. The market mood has improved this week, with quarterly earnings in the financial sector beating expectations, which has boosted appetite for risk, offsetting concerns about inflation and supply chain bottlenecks and hurting safe assets like the dollar.

The US Treasury yields rally, another source of strength for the US dollar, has lost steam this week. The yield of the benchmark 10-year note has retreated from levels above 1.60% on Monday to week lows around 1.51% on Thursday, with shorter-term yields rallying to multi-month highs, thus flattening the US yield curve.

Furthermore, some market sources suggest that the investors have “sold the fact” this week, closing long dollar positions after the US CPI confirmed that price inflation will remain for longer than previously expected and so did the Fed regarding their plan to start tapering bond purchases before the end of the year.  

EUR/USD likely to extend losses towards 1.1100 – Scotiabank

The FX Analysis team at Scotiabank sees the current euro recovery as a selling opportunity within a longer-term bearish trend: “Gains have alleviated short-term bearish pressure on spot but longer-term (daily, weekly) trend studies remain firmly negative for the EUR; we expect limited EUR upside potential as a result (…) Minor, short-term gains are a selling opportunity; we continue to target the low 1.14s in the short run for EUR/USD and feel the 1.11 is reachable in the next few months.”

Technical levels to watch