EUR/USD regains traction, resumes the upside above 1.1400

• EUR/USD picks up pace and extends the bounce off 1.1400.
• The greenback remains under pressure and retests the 95.00 area.
• German 10y Bund yields add to Friday’s gains around -0.03% region.

The optimism seems to have returned to the single currency and now lifts EUR/USD back to the 1.1430 zone at the beginning of the week.

EUR/USD stays supported around 1.1400

Following Friday’s moderate pullback to the 1.1400 neighbourhood, EUR/USD regains upside traction amidst the resumption of the risk-on trade among market participants and the weaker greenback, while earlier results in the Chinese calendar also collaborate with the upbeat mood.

The greenback starts the week on the negative ground following disheartening results from the US docket on Friday despite the decent move higher in US yields.

Indeed, earlier results in China showed the economy expanded at an annualized 4.0% during the October-December 2021 period, while Industrial Production expanded above estimates 4.3% YoY in December. On the not-so-bright side, the domestic demand remains weak after Retail Sales expanded less than forecast 1.7%, also in the year to December. These data in the Chinese economy might prompt some easing from the PBoC going ahead, which should remain supportive of further improvement in the risk complex.

The upside bias in the pair looks underpinned by the climb in yields of the 10y German Bund to the -0.03% zone, adding to Friday’s uptick.

In the domestic calendar, final Italian inflation figures for the month of December will be the sole release, while the Eurogroup is expected to meet later in the day.

What to look for around EUR

EUR/USD came under pressure after hitting new tops in the 1.1480 region. The outlook for the pair looks improved in past sessions, particularly after leaving behind the 4m line on January 12, today around 1.1380. In the meantime, the Fed-ECB policy divergence and the performance of yields are expected to keep driving the price action around the pair for the time being. ECB officials have been quite vocal lately and now acknowledge that high inflation could last longer in the euro area, sparking at the same time fresh speculation regarding a move on rates by the central bank by end of 2022. On another front, the unabated advance of the coronavirus pandemic remains as the exclusive factor to look at when it comes to economic growth prospects and investors’ morale in the region.

Key events in the euro area this week: Eurogroup Meeting (Monday) – Ecofin Meeting, Germany/EMU ZEW Survey (Tuesday) – Germany Final December CPI (Wednesday) – EMU Final December CPI, ECB Accounts (Thursday) - ECB Lagarde, EC’s Flash Consumer Confidence (Friday).

Eminent issues on the back boiler: Asymmetric economic recovery post-pandemic in the euro area. ECB stance/potential reaction to the persistent elevated inflation in the region. ECB tapering speculation/rate path. Italy elects President of the Republic in late January. Presidential elections in France in April.

EUR/USD levels to watch

So far, spot is gaining 0.10% at 1.1426 and faces the next up barrier at 1.1482 (2022 high Jan.14) followed by 1.1501 (100-day SMA) and finally 1.1511 (200-week SMA). On the other hand, a break below 1.1398 (low Jan.14) would target 1.1351 (55-day SMA) en route to 1.1272 (2022 low Jan.4).