EUR/USD consolidates close to 1.2150 as buck bears take a breather

• EUR/USD has been driven primarily by the dollar side of the equation on Friday, trading around 1.2150. 
• USD has not sustained lasting damage in wake of softer than forecast labour market data.

EUR/USD is consolidating around 1.2150 level in wake of softer than expected US jobs data that in the end have not delt lasting damage to the US dollar. The pair, which resides between 1.2132 lows than to 1.2177 highs, trades flat on the day. Indeed, it seems as though the dollar bears are finally taking a breather after this week’s relentless USD beating. The Dollar Index is down over 1% on the week, and EUR/USD is up roughly 1.5%.

What next for EUR/USD?

This week’s relentless EUR/USD rally, spurred by a combination of vaccine and fiscal stimulus optimism that has kept broader market risk appetite buoyant (and US equities trading at record highs), is likely to have turned some heads at the ECB.

But words may not be enough to undo this rally as they were over summer, indeed markets seemingly will prefer to see action at next week’s meeting. Back at the end of October, when the ECB last met, talk was of a big easing package. At the time, the Eurozone was heading back into lockdown amid a second wave of Covid-19.

However, much has changed since then; vaccines news and the election of Joe Biden has materially brightened the Eurozone’s economic outlook for 2021 and, prior to the start of the pre-meeting blackout, the dovish tone of the ECB back in November had appeared to become more tempered. No need to ease financial conditions further, said ECB’s Isabelle Schnabel this week, rather just prolong the duration of easy financial conditions. In other words, a lengthening of the duration of the ECB’s QE and TLTRO programmes, rather than an expansion. Indeed, ECB sources on Friday morning suggested a 12-month extension to the latter is a serious consideration.

How EUR will react to the above remains to be seen, but the Eurozone’s growing real-rate advantage over the US (partly as a result of Eurozone CPI slipping towards zero) has supported EUR/USD over the last few months. If the ECB continues to fail to inspire confidence in markets that its can credibly meet its inflation target, then more EUR upside might yet lay ahead.

All of the above might not even matter if USD continues to fall at its current rate. Indeed, though USD did not sustain lasting damage in wake of Friday's jobs report, many still argue that risks remain to the downside given how Friday's jobs report makes makes further Fed action (dovish and USD negative) as well as more fiscal stimulus (risk on so USD negative) more likely. Meanwhile, the best arguments for USD strength right now are to do with rising US bond yields and the fact the market is already super short USD, with some kind of short-squeeze likely overdue.

One downside risk to EUR that is worth noting is the current deadlock regarding the EU recovery fund and budget. Poland and Hungary reiterated their opposition and that they will continue to use their vetoes as long as rule of law provisions are in play. Meanwhile, the EU is starting to talk tougher in response, with EU Economy Commissioner Paolo Gentiloni saying on Friday morning that the EU will not surrender to Hungary and Poland's veto on the recovery fund and will go on without them if needed. Should EU stimulus face serious delay, this could hurt the Eurozone recovery in 2021 and hurt EUR.

EUR/USD key levels