EUR/USD Gains from Dollar Weakness Early In Holiday-shortened Week

Image © European Union 2018 - European Parliament, Reproduced Under CC Licensing. 

- EUR on course for fourth daily gain as USD weakens. 

- EUR/USD marches higher even as risk appetite falters.

- EUR seen eyeing a move above 1.12 handle intraday.

- But U.S. manufacturing surveys are a risk this week.

The Euro was on course for its fourth consecutive day of gains over a rapidly weakening Dollar Monday even as risk appetites appeared to falter, although U.S. manufacturing PMI surveys due over the remainder of the week are a downside risk to the Euro-to-Dollar rate. 

Europe's single currency advanced against all of its major counterparts other than the New Zealand Dollar and Pound Sterling on Monday with no obvious catalyst for the move beyond a sell-off in emerging market currencies, although the Euro has been on its front foot for days.

"With two trading days left for 2019, major US equity indices have risen 23-36% this year. Treasury yields continued to decline slightly on Friday with the 10y yield trading around 8bps below the levels of early last week. EUR/USD has this morning continued its Friday’s surge and the dollar index (DXY) has weakened slightly more than 1% in past few day," says Jussi Hiljanen, a strategist at SEB. 

Above: Euro-to-Dollar rate shown at hourly intervals.

"The euro extended its pre-weekend rally and traded above $1.12 in Asia for the first time in four months.  It has straddled the level in Europe but appears to be poised to move higher.  The next chart points are found in the $1.1225-$1.1235 area.  For the record, it was near $1.1445 a year ago. Sterling is firm as it continues to recover from the post-election profit-taking that saw it slide from $1.35 to nearly $1.29.  It rose to $1.3125 today," says Marc Chandler, chief market strategist at Bannockburn Global Forex.

Monday's price action comes as markets digest reports of a U.S. missile strike on an Iranian-backed militant group in Iraq and Syria. Secretary of State Mike Pompeo told reporters further strikes may be warranted so it's possible that risk-off price action in currency and stock markets was prompted by the prospect of fresh tensions between the U.S. and Iran in the Gulf. 

The Dollar has ceded ground to the Euro after President Donald Trump said last week that he and his Chinese counterpart will sign their phase one deal “when they get together." The agreement already averted one round of tariffs this month, but the leaders are not scheduled to meet in the coming weeks and markets might worry if there's still no sight of ink on paper at the end of January. 

"The main drivers of the weaker dollar have likely been risk appetite holding up in the wake of comments from the US pertaining to a Phase One trade deal recently as well as the US Federal Reserve’s continued repo operations, which have recently been undersubscribed," says Lee Hardman, an analyst at MUFG. 

Above: Dollar Index shown at daily intervals.

Trump said ahead of the holiday that China has already begun the "large scale purchases" of agricultural products it is said to have agreed to buy as part of the deal although China's Ministry of Commerce has said the deal's contents would be made public only after a signing ceremony has taken place. And investors are still nonethewiser as to when that will happen. 

The U.S.-China pact, which has prevented new tariffs and is expected to roll back some existing levies on exports to either side, helped arrest a mult-month decline in the Euro-to-Dollar rate in early October. It was a significant development for the troubled Eurozone economy, which is sensitive to Chinese growth and was badly hurt by the 2018-2019 escalation of the conflict, although the UK-EU withdrawal agreement and Conservative Party election win has also offered support to the single currency by reducing the threat of a 'no deal' Brexit.

"The RSI is bullish and calls for further upside," says Remy Gaussens, head of research at Trading Central. "Our preference is for long positions above 1.1170 with targets at 1.1220 & 1.1240 in extension."

Above: Euro-to-Dollar rate shown at daily intervals. 

The Euro has benefitted from Dollar weakness and a favourable environment for risk assets of late but the week ahead will provide insight into the likely health of the U.S. economy at year-end, and any fresh signs of Transatlantic economic divergence could might undermine the single currency's newfound strength. After all, U.S. economic resilience has led the Federal Reserve (Fed) to declare that the current 1.75% level of U.S. interest rates will remain "appropriate" in the absence of a "material reassessment" of the outlook, which is entrenching the Dollar's interest rate advantage over other currencies. 

Markets are looking for the Chicago PMI, which measures current economic conditions in the third largest U.S. city, to rise from 46.3 to 48.2 for the month of December when it's released at 14:45 pm Monday. And consensus favours an increase from 48.1 to 49 for the Institute for Supply Manufacturing (ISM) PMI due out at 15:00 on Friday. If market expectations of those releases are right then then they could herald an improvement in sentiment toward the U.S. economy, outlook and Dollar.