EUR/USD consolidates close to seven-week highs above 1.2200 ahead of more Fed speak

EUR/USD broke above a key area of technical resistance between 1.2180-90 early on during European trading hours and is now consolidating in the 1.2220s, just below earlier session (and seven-week) highs in the 1.2240s. At present, the pair trades with gains of about 0.5% or nearly 70 pips on the day, with the euro (for once!) the best-performing currency in the G10.

Driving the day

Month-end flows are being cited as the major factor behind Thursday’s move in favour of the euro and against the US dollar. The above noted important technical breakout to fresh seven-week highs is also likely playing a part, mind. The euro also seems to be deriving some support via its other crosses, most notably EUR/GBP, which has rebounded more than 70 pips on the day to the 0.8675 region, a decent recovery from Wednesday’s lows of under the 0.8550 mark.

Aside from the above, there are not any clear fundamental reasons as to why the euro should be performing so well on the day. European bond yields have been rising, but to a similar degree to the rise in US bond yields, meaning US/European bond yields spreads have not moved that much. Not enough for currency traders to fuss about anyway.

Admittedly, the March German GfK Consumer Confidence survey released at 07:00GMT on Thursday morning was decent; the headline index came in above expectations at -12.9, though this is still well below pre-pandemic levels, unsurprising really as Germany wallows in lockdown, with no hope of imminent easing absent a significant drop in the Covid-19 infection rates amid the country’s sluggish vaccine rollout. Thus, the data did not seem to change the dial at all for the euro. Consumer and business surveys out of Italy, from the European Commission for the Eurozone (both of which were on the whole strong) and US data (strong Weekly Jobless Claims and January Durable Goods Orders numbers) have also been ignored.

Markets have taken much more of an interest in central bank speak versus economic data over the last few days. Recount that Fed Chair Jerome Powell was very dovish at the semi-annual testimony before Congress and played down concerns that the economy might overheat, but did not signal much concerns about recent rising bond yields. Fed members James Bullard and Ester George were both on the wires today and expressed similar sentiment. The above seems to have been a USD negative this week; a dovish Fed, keen to communicate that any tightening is still a long way off, does not bode well for the US dollar and while the Fed isn’t concerned about rising rates just yet, if it does become concerned, to cap rising rates it is going to have to tweak or expand its QE programme, which is a dovish (and USD negative) move.

Looking ahead, influential FOMC member and President of the NY Fed John Williams is set to speak at 20:00GMT. Earlier in the week and in sync with other Fed members, Williams played down concerns about rising bond yields. Note, however, that since he last spoke, the US 10-year yields is up about a further 13bps and is now closing in on 1.50%. Focus then turns to preliminary February inflation numbers out of France and Spain during Friday’s early European session, before turning to US Core PCE (the Fed’s favoured inflation measure) ahead of the US open.