EUR/USD consolidating just below annual highs above 1.2300

• EUR/USD trip to fresh annual highs above the 1.2300 level earlier during the session was brief.
• ECB jawboning has presented a mild impediment to further EUR/USD strength.

EUR/USD briefly rallied as high as 1.2310 around the time of the US market open, only to quick reverse back below 1.2300 on jawboning from ECB member Oli Rehn. However, the pair has remained supported above the 1.2280 mark and is currently consolidating just below the big figure. EUR/USD is mainly higher on Wednesday as a result of increasingly soft US dollar conditions and despite being off highs, currently still trades with gains of around 40 pips or more than 0.3%.

ECB Jawboning

Contributing to EUR/USD minor pullback from highs above the 1.2300 level was “jawboning” from ECB Governing Council Member Oli Rehn; he reiterated the comment made by other ECB members (such as President Christine Lagarde, Francois Villeroy de Galhau and Philip Lane). Such comments are designed to reduce the rate at which EUR is appreciating against its major counterparts, most notably USD, by hinting that is appreciation continues the ECB will “do something about it”.

The only problem is that unless the ECB is willing to ease monetary conditions further from their current levels, perhaps by pumping stocks higher and real interest rates lower via more rate cuts or an increased pace of asset purchases, these threats are all bark no bite. Indeed, the ECB made it expressly clear in December that its aim at the moment is not to ease monetary conditions anymore, but just to prolong the duration of time that conditions are at their current easy levels. Keeping monetary conditions at current (easier) levels for longer as opposed to actually making current monetary conditions easier is unlikely to be enough to turn the tide against further EUR/USD appreciation, most analysts would argue.

Soft USD conditions

Most institutions are calling for a weaker dollar in 2021 as global growth (by the second half of the year, anyway) starts to see significant improvement as major economies approach herd immunity against Covid-19. Though USD short positioning, according to the most recent CFTC report, is close its highest levels in 2020, traders still seem keen to front-run some of this US dollar weakness going into the new year.

US fiscal and political developments appear not to be doing the US dollar much favours either; it is looking increasingly likely that 1) Congress is soon going to approve a juiced-up $2000 stimulus cheque to each American (vs $600 before) and 2) the Democrats might win both of the Senate seats up for grabs in the Georgia run-off election (which would hand the Democrats control over Congress and trillions more would be spent and borrowed by the US government in 2021).

Pretty much, it looks like more stimulus is increasingly likely which is being seen as a US dollar negative given 1) the stimulus will boost US and global growth which is good for risk assets and bad for safe-haven USD and 2) the stimulus is likely to encourage further Fed money printing to keep real interest rates from rising.