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Euro retreats to 1.1360

Major currencies displayed patchy dynamics ahead of the weekend. The dollar declined by 1.16% against the Japanese yen, and by 0.48% against the Swiss franc. The list of underperformers also included the New Zealand dollar (-1.31%), the British pound (-0.86%), the euro (-0.62%), the Australian dollar (-0.53%), and the Canadian dollar  (-0.73%).

The EURUSD pair rose 0.29% to 1.1345 on Friday, January 21. Price action climbed to 1.1360 at the beginning of the North American session, then pulled back. Major US stock indices fell sharply on Friday after Netflix tanked 22% on the back of a weak earnings report. The S&P 500 (-5.7%) and Nasdaq (-7.6%) posted the steepest weekly percentage drop since the onset of the pandemic in March 2020. On Friday, the euro, along with the franc and the yen, also played a protective role as funding currencies (selling US stocks – swapping dollars for euros – and channeling euros to the Eurozone in return for cheap loans).

On January 18, the EURUSD pair relapse into consolidation mode between 1.1220 and 1.1386, where it had trading for almost two months. If buyers manage to push back above 1.1385, the outlook for growth will improve. On the other hand, a break below 1.11285 whould open the door to new losses and a test of 1.1220.

Today’s macro agenda (GMT+3)

  • 11:15 France: manufacturing and services PMI (January)
  • 11:30 Germany: manufacturing and services PMI (January)
  • 12:00 Eurozone: manufacturing and services PMI (January)
  • 12:30 UK: manufacturing and services PMI (January)
  • 17:45 US: manufacturing and services PMI (January)

Current outlook

Major currencies were trading in the red by the time of writing, while US index futures hovered in positive territory, up over 0.65%. Market participants are shifting their focus to the FOMC meeting that gets underway tomorrow. The Fed is expected to keep rates close to zero and prepare the markets for monetary tightening in March. At that time, the regulator is widely expected to wind down its accommodative (QE) stance and raise rates by 25 bps for the first time, to 0.25%-0.2%. A total of 3-4 rate hikes are antipcated this year.

EURUSD slipped to 1.1314 during Asian trading. The setup in euro crosses looks favorable for buyers. The trendline crosses through 1.1310, acting as support until the Fed meeting. Heightened volatility could break out after the release of Eurozone manufacturing and services PMIs. We expect to see a slight recovery in the key pair to 1.1340 by the close.

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