• EUR/USD drops to new lows in the 1.1390/85 band.
  • The pair remains under pressure following recent tops near 1.1490.
  • German ZEW survey next of relevance in the domestic calendar.

The European currency remains under pressure so far in the second half of the week and is draging EUR/USD to multi-day lows in the 1.1390/85 band on turnaround Tuesday.

EUR/USD looks to USD, yields

EUR/USD extends the downside momentum to the sub-1.1400 region on the back of the Greenback's persevering recovery, which encouraged the US Dollar Index (DXY) to bounce off recent 2-month lows.

Higher US yields and rising speculation that the Fed could raise the Fed Funds Target Range as soon as at the March meeting have been underpinning the positive sentiment in the dollar and keeping the mood depressed in the risk complex.

On another front, market participants do not expect the EcoFin meeting to have any impact on the FX space, where the European recovery fund is predicted to be at the centre of the debate.

In the domestic calendar, investors will focus on the release of the Economic Sentiment in both Germany and the broader Euroland for the month of January, tracked by the ZEW survey. Earlier in the session, the German Car Registration expanded 14.8% in December vs. the previous month.

Across the pond, the NY Empire State Index, the NAHB Index and TIC Flows are all due later in the NA session.

What to look for around EUR

EUR/USD came under pressure after hitting new highs in the 1.1480 region earlier in the month. In the meantime, the Fed-ECB policy divergence and the performance of yields are expected to keep driving the price action around the pair for the time being. ECB officials have been quite vocal lately and now acknowledge that high inflation could last longer in the euro area, sparking fresh speculation of a move on rates by the central bank by the end of 2022. On another front, the unabated advance of the coronavirus pandemic remains the exclusive factor for economic growth prospects and investors’ morale in the region.

Key events in the euro area this week: Ecofin Meeting, Germany/EMU ZEW Survey (Tuesday) – Germany Final December CPI (Wednesday) – EMU Final December CPI, ECB Accounts (Thursday) - ECB Lagarde, EC’s Flash Consumer Confidence (Friday).

Eminent issues on the back boiler: Asymmetric economic recovery post-pandemic in the euro area. ECB stance/potential reaction to the persistent elevated inflation in the region. ECB tapering speculation/rate path. Italy elects President of the Republic in late January. Presidential elections in France in April.

EUR/USD levels to watch

So far, spot is losing 0.04% at 1.1398 and faces the next up-barrier at 1.1482 (2022 high Jan.14) followed by 1.1496 (100-day SMA) and finally 1.1511 (200-week SMA). On the other hand, a break below 1.1398 (low Jan.14) would target 1.1348 (55-day SMA) en route to 1.1272 (2022 low Jan.4).

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