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EURUSD Close To 1.20 Helped By Month-End Flows


Posted: Tuesday, September 1st, 2020

Estimated Reading Time: 2 minutes

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One of the biggest performers during the summer, the EURUSD pair, almost reached 1.20. It stalled at the level, three-pips before touching it. At the time of writing this article, the HICP core inflation dropped to record lows – yet the EURUSD keeps trading with a bid tone.

Some cracking signs appear on the horizon, though. First, the Euro crosses are not so bid. In fact, the EURGBP trades with a bearish tone, moving below 0.89 for the first time in months.

Second, the European Central Bank (ECB) next week must act to steam the Euro’s rise. With core inflation at record lows, the price stability mandate requires the central bank’s intervention. Moreover, the stronger the currency, the more it weighs on inflation.

EURUSD

ECB Failed to Spur Inflation – EURUSD At the Highs

If there is an explanation for the higher EURUSD exchange rate, it comes from the easing on the two sides of the ocean. On the one hand, the ECB delivered unprecedented stimulus. On top of that, the joint debt issuance paves the road for common fiscal policies in the future. Therefore, what the Euro lacked in the past, is suddenly here.

On the other hand, the Fed in the United States outpaced the ECB. It eased more, restarted the quantitative easing program, and extended its USD swap lines. Together with the fiscal stimulus delivered by the Congress, the increase in the M2 money supply in the United States dwarfs what we have seen in the Euro area. Hence, the EURUSD reflects that difference.

The USD short positioning is reflected all over the FX dashboard. However, the EURUSD pair has seen one of the steepest rises of all the currency pairs, up sharply since the March USD tantrum.

Perhaps there is no better time to note a currency’s strength or weakness than during the fixing times. Every day, week, month, and even year, have a fixing time. Naturally, the daily fixing time is more important when it also marks the end of the week or month.

Yesterday’s fix marked the end of the month. The USD was called lower across the board, with the EURUSD in the lead. The Commitment of Traders (COT) report for the end of August showed that the USD bears had put all their eggs mainly in one basket – the EURUSD.

Next week’s ECB meeting is key. If the ECB tolerates such a high EURUSD rate while inflation runs so low, it will have a hard time maintaining its price stability mandate.

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