EUR/USD fades part of the recent strength, returns to 1.1260

The single currency fades part of Friday’s optimism and drags EUR/USD back to the area well south of the 1.1300 mark at the beginning of the week.

EUR/USD looks to Lagarde, Powell, data

EUR/USD so far reverses two consecutive daily advances and returns to the 1.1260 region in the wake of the opening bell in the European markets and against the backdrop of a broad-based recovery in the US dollar.

Indeed, the greenback regains upside traction and manages to leave behind part of Friday’s acute pullback, as investors continue to favour the safer assets in a context of rising uncertainty following the discovery of the newly dubbed omicron variant of the coronavirus in southern Africa.

Earlier in the session, ECB’s I.Schnabel said the inflation is expected to lose traction and she sees it returning to the bank’s target during next year. Schnabel also deemed as premature any attempt to tighten the current monetary conditions.

In the domestic calendar, the European Commission will publish the final Consumer Confidence gauge for the month of November seconded by preliminary inflation figures in Germany during the same period. In addition, Chairwoman C.Lagarde is due to speak in Turin followed by speeches by Board members A.Enria, I.Schnabel, P.Hakkarainen and L. De Guindos.

What to look for around EUR

EUR/USD regained the key 1.1300 barrier and advanced to fresh multi-day highs at the end of last week. The corrective downside in the greenback propped up the move higher in spot, although this is regarded as temporary. Fresh coronavirus concerns sparked after the new variant omicron was discovered last week is likely to keep the demand for the safe haven on the raise at least in the very near term. In the meantime, the outlook for the European currency remains well into the bearish territory on the back of the ECB-Fed policy divergence, increasing COVID-19 cases in Europe as well as some loss of momentum in the economic recovery in the euro area, as per some weakness observed in key fundamentals.

Key events in the euro area this week: German Flash CPI, Final Consumer Confidence, ECB’s Lagarde (Monday) - German labour market report, EMU Flash CPI (Tuesday) - German Retail Sales, EMU/Germany Final Manufacturing PMIs (Wednesday) – EMU Unemployment Rate (Thursday) – EMU/Germany Final Services PMIs, ECB’s Lagarde (Friday).

Eminent issues on the back boiler: Asymmetric economic recovery post-pandemic in the region. Increasing likelihood that elevated inflation could last longer. Pick-up in the political effervescence around the EU Recovery Fund in light of the rising conflict between the EU, Poland and Hungary on the rule of law. ECB tapering speculations.

EUR/USD levels to watch

So far, spot is losing 0.39% at 1.1261 and faces the next up barrier at 1.1332 (weekly high Nov.26) followed by 1.1374 (high November 18) and finally 1.1398 (20-day SMA). On the other hand, a break below 1.1186 (2021 low Nov.24) would target 1.1185 (monthly low Jul.1 2020) en route to 1.1168 (low Jun.19 2020).