EUR/USD looks bid around 1.1350, dollar remains on the defensive

• EUR/USD extends the upside to the 1.1370 region.
• Final December EMU CPI, ECB Accounts next on tap.
• US Initial Claims, Philly Fed Index come next in the NA session.

The buying interest around the single currency remains unchanged and pushes EUR/USD to 2-day highs in the 1.1370 in the wake of the opening bell in Euroland on Thursday.

EUR/USD underpinned by risk-on trade

EUR/USD posts gains for the second straight session so far in the second half of the week, always in response to the renewed offered stance in the US dollar, which in turn remains under pressure following the decline in US yields.

The early rate cut by the Chinese central bank (PBoC) seems to have bolstered the appetite for riskier assets, motivating spot to extend gains for another session. Indeed, the PBoC reduced the 1Y Loan Prime Rate (LPR) to 3.7% (from 3.8%) and the 5Y LPR to 4.6% (from 4.65%). The bank’s move on the latter was the first one since April 2020.

In the meantime, US yields keep correcting lower and weigh further on the greenback, at the time when market participants seem to be pricing in more and more an interest rate hike by the Fed at the March meeting.

In the domestic calendar, the final December inflation figures in the euro area come next, while the ECB will publish its Account of the last meeting. Earlier, Germany’s Producer Prices rose 5% MoM during December and 24.2% over the last twelve months.

Data wise across the Atlantic, weekly Claims and the Philly Fed manufacturing gauge will be in the limelight seconded by Existing Home Sales.

What to look for around EUR

EUR/USD came under pressure after hitting new YTD highs in the 1.1480 region earlier in the month, finding some contention in the low-1.1300s so far this week. 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: 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 0.07% at 1.1350 and faces the next up barrier at 1.1482 (2022 high Jan.14) followed by 1.1485 (100-day SMA) and finally 1.1510 (200-week SMA). On the other hand, a break below 1.1314 (weekly low Jan.14) would target 1.1272 (2022 low Jan.4) en route to 1.1221 (monthly low Dec.15 2021).