Will ECB policy add to EUR/USD woes?

This week, the dollar beat up euro and the trend in EUR/USD remained negative. The catalyst for the dollar strength has been the rise in US Treasury yields. The 10-year bond had climbed to 1.60% earlier on Monday, as a response to the Senate passing a massive $1.9 trillion stimulus package last Saturday. The Democrats, who control both houses of Congress, plan to send the bill to President Biden for his signature by March 14 and there are high chances that it will get passed. Now the attention turns to the release of US inflation figures for February due tonight, which will ultimately dictate the path forward for bond prices ahead of next week’s FOMC monetary policy meeting. The market expects US inflation to remain elevated compared to January figure and a larger-than-expected rise in consumer price growth will likely bring forward Fed tapering expectations, opening doors for bonds to continue falling and the US dollar to extend its recovery.

Meanwhile, the ECB Governing Council will meet on Thursday and the focus will be on President Lagarde’s comments over rising bond yields and their impact on the real economy in light of the still fragile economic outlook. Overall, eurozone data is mixed and it is still in an economic downturn due to the Covid pandemic. Higher yields could lead to higher borrowing costs which would hamper economic recovery, so policymakers are expected to state their displeasure with the rise in eurozone bond yields, which could add to the euro’s woes. On the monetary policy front, ECB will continue its auto-pilot mode, and will commit to maintain “favourable” financing conditions. The focus will also be on the use asset purchases under the pandemic emergency purchase programme (PEPP).

As seen in the daily chart, EURUSD after hitting a seven week’s high of 1.2242 made reversal and is currently trading at 1.1875. The immediate strong bottom-to- bottom trend line as well as Bollinger lower band support level is located at 1.1830. A consistent trading below 1.1830 will open doors for 1.1760-1.1600. However, if it respected the crucial 1.1830 mark, then we may see a bounce up to 1.1985-1.2025 (trend line as well as Bollinger band medium level resistance level) and a constant trading above 1.2030, only will see next resistance at 1.2090-1.2155.