EUR/USD slumps below 1.1400 for first time since July 2020

• EUR/USD has slumped under the 1.1400 level for the first time since July 2020 and is now over 0.5% lower.
• The pair has also broken to the south of a long-term downtrend, signaling a near-term acceleration of the bear-run.

EUR/USD has slumped under the 1.1400 level for the first time since July 2020. The pair trades lower by about 0.5% on Monday and has broken below a few key areas of support on its way down, including at around 1.1420 and then the psychologically important 1.1400 level just below it. The bears will now look to push the pair lower towards the next area of support at 1.1350. If that breaks, it’s a clean run lower to the late June/early July 2020 lows under 1.1200. Notably, EUR/USD broke to the downside of a long-term downtrend that had been supporting the price action going all the way back to August, signaling a near-term acceleration of the pair’s bear run.

Market commentators are citing a few fundamental reasons for EUR/USD’s drop. Firstly, US bond yields have reversed early losses and now the yield curve is predominantly higher, as well as steeper. US 30-year yields are up around 6bps on the day and flirting with the 2.0% level again, while German 30-year yields are up a more modest 3bps. Meanwhile, the US 2s10s spread has widened by about 3bps, while the German 2s10s spread has narrowed by just under 1bps. A steepening of the yield curve suggests improved optimism about future economic growth and inflationary outcomes that hasn’t also exacerbated fears about near-term monetary policy tightening.

The steepening of the US curve is a result of a better than expected US regional Fed manufacturing survey released earlier in the session. To recap, the NY Fed Manufacturing survey for November rose to 30.9 from 19.8 in October, well above the expected rise to 21.6. This is a good sign that the solid start the US economy enjoyed to Q4 continued into the second month of the quarter and this will be boosting USD directly, not just indirectly via yields.

Note that as the data points to the US picking up economic momentum, the Eurozone economy is expected to slow in the coming months amid surging Covid-19 infection rates that threaten hurting consumer confidence and the reimposition of restrictions (the Netherlands has already implemented a full lockdown). This is also touted as bearish for EUR/USD.

Finally, dovish remarks from ECB members may also have highlighted fundamentals divergences between the euro and dollar; the general message was to emphasise that the bank still view the current spike in inflation as transitory and that cost-push inflation (higher energy/fuel bills) is hurting the economy, thus the ECB should keep financing conditions accommodative.

Looking ahead to the rest of the week, more ECB speak is also likely to be (mostly) dovish and there is no tier one Eurozone data. Focus will be on stateside events. Fed speakers come out in force and will need to comment on inflation after last week’s surprise and markets await US President Joe Biden’s Fed Chair appointment decision. There is also a decent dose of data for traders to sink their teeth into, starting with the October US Retail Sales report out on Tuesday.