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Euro extends gains in Asian trading

Key headlines driving EURUSD:

— USD moves lower across the board.  

— Greenback shrugs off rising UST yields.

US10Y yield climbs to 1.67%.

— Euro trades higher against US currency, but lower against sterling.

— Jens Weidmann, ECB Governing Council member/Bundesbank President is to step down at year-end.

— Sterling drops momentarily to 1.3741 amid slowdown in UK inflation.

— 3Q corporate earnings lend support to US stock market and risk assets.

— Gold price rises to $1,780/oz.

— Evergrande plunges after stake sale falls through, denting risk appetite.

The EURUSD pair rose 0.15% to 1.1651 on Wednesday, October 20. During the North American session, the pair recouped intraday losses, tapping into dollar weakness and improved risk appetite.

The US currency came under pressure amid positive investor sentiment in financial markets, which was largely driven by the release of upbeat 3Q corporate earnings reports.

Widening of the US10Y yield did not help the dollar, as market participants expect monetary policy tightening not only from the Federal Reserve, but also from other central banks. Accordingly, bond yields are also increasing in these countries, lending support to national currencies.

Sterling sank to 1.3741. The main reason for its weakening was UK inflation data, which fell short of forecasts. Investors believed the data would prevent the BoE from raising rates, as a result of which selling picked up. The pair drew support from weakness in the US dollar.

The euro came under further pressure from news that Jens Weidmann, member of the ECB Governing Council and President of Bundesbank, will step down at the end of this year. In the upshot, EURUSD closed at 1.1651. Precious metals and oil saw gains.

Today’s macro agenda (GMT 3)

  • 13:00 UK: CBI industrial trends orders (October)
  • 15:30 US: Philadelphia Fed manufacturing index (October), initial jobless claims (October 8-15); Canada: ADP employment change, new housing pricing index
  • 17:00 Eurozone: consumer confidence flash (October); US: CB leading index (September), existing home sales (September)
  • 22:00 Australia: RBA Governor Lowe speech

Current outlook

Major currencies were trading slightly in the red by the time of writing. The aussie dollar and the Canadian dollar showed the steepest losses. These currencies pared gains against the dollar as Asian indices and US index futures moved lower.

US stock indices are hovering close to all-time highs. Buying activity could decrease as some players opted for profit-taking. Strong 3Q corporate earnings are helping investors overcome doubts about the impact of the Delta variant of the coronavirus, supply chain disruptions and the likelihood that the Fed will decide to start tapering QE.

China Evergrande fell sharply on Wednesday after scrapping plans to sell a 50.1% stake in its property services unit, which would have fetched the company $2.6 bln, while no progress has been made on other sales. A 30-day grace period expires on Saturday. The company will be forced to declare default unless coupon payments are made.

The company’s shares tanked 10% at the open, after trading was halted on October 4. Competing developers have been making bond interest payments. Chinese regulatory authorities have assured investors that everything is under control.

Technical analysis

By the time of writing, the euro was trading at 1.1655. The pullback slightly changed the intraday technical picture, but the uptrend from 1.1525 is still in play. If buying of the single currency stalls during the European session, a double top pattern should cause a retracement to 1.1620. The target remains 1.1690 For buyers. It would be good if the euro reaches a high of 1.1670 before the North American trading session.

FX players are also advised to monitor the dynamic of the EURGBP cross rate. The pair is not in great shape and could let buyers down when paired with the dollar. Investors expect the BoE to hike rates, so the euro looks weak alongside sterling. In order for the technical picture to change, price action will need to retrace to 0.8463. Consequently, amid a weakening dollar and a decline in the cross, sterling could move up to 1.3870.

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