EUR/USD set to close out week under 1.1300, after lockdown fear battering

Things are not looking good for EUR/USD, with the currency pulling back beneath the psychologically important 1.1300 level as FX volumes thin and the weekend approaches. Technicians may well view failure to close to the north of 1.1300 as a bearish signal heading into next week. Since EUR/USD broke below a long-term descending trend channel, its not particularly surprising to have seen the pace of the sell-off pick up in recent days. Bearish technicians will have their sights firmly set on a test of the next key area of support around the 1.1150-1.1180 area.

Recapping the day's action then: EUR/USD started the session off above 1.1370, but as the news hit on Friday morning that Austria was to implement a full lockdown and that Germany soon follows, the pair dropped like a stone. Analysts unanimously agree that widespread lockdowns in Europe over the coming months will deliver a significant blow to the Eurozone growth (meaning negative revisions to forecasts), giving the ECB more reason to be dovish in the face of high inflation. By the late European morning, the pair had printed a fresh 16-month lows at 1.12501. Some profit-taking then allowed it to recover back as high as 1.1320 as the US session began, but hawkish vibes from key Fed members which injected upside into short-end and real US bond yields gave USD a boost.

For reference, Governor Christopher Waller called for an accelerated QE taper and said that rate increases could be appropriate as soon as Q2 2022. This followed a similar message from St Louis Fed President James Bullard, who earlier in the week urged the Fed to double the pace of its QE taper to $30B per month in January. Shortly after Waller had finished orating, it was influential Vice Chairman of the FOMC Richard Clarida’s turn. He didn’t speak much on policy but did say that it may be appropriate to discuss an accelerated QE taper in December. Plenty more FOMC members will hit the wires next week market participants will be eager to assess the appetite on the Committee for an accelerated QE taper and earlier rate hikes.

Looking back on the week in its entirety, it’s been an ugly one. At present levels, the pair is set to close with weekly losses of about 1.4%, its worst performance since mid-June. Strong US Retail Sales, NY and Philly Fed survey, Weekly Jobless Claims and Building Permits data, as well as on Friday all helped the dollar push on. Meanwhile, the resolutely dovish tone of core ECB members and the escalating Covid-19 crisis in Europe hurt the single currency.