Euro pauses after recent gains

The euro has posted small gains in the Wednesday session. Currently, EUR/USD is trading at 1.2130, up 0.10% on the day.

Euro gaining ground

EUR/USD lost close to 1% last week and crossed below 1.20, a psychologically important line. However, a disappointing US nonfarm payrolls report was just what the doctor ordered, as the US dollar responded with broad losses to end the week. The euro has continued to rally this week and has pushed well into 1.21 territory at the time of writing. The US dollar index has ticked lower on Wednesday and is currently at 90.31. A drop below the 90-line would be a bearish signal for the US dollar.

Economic conditions in the eurozone remain weak. The resurgence of Covid, with new strains of the virus, have resulted in more lockdowns which have hampered economic activity, in particular the services sector. The rollout of Covid vaccines in the eurozone has been slow and inefficient, which will make the recovery from Covid even more lengthy. The eurozone may already be in recession, with declines expected in GDP in Q4 of 2020 as well as Q1 of this year. At the same time, we’re seeing better inflation numbers out of eurozone and Germany, the bloc’s largest economy. German Final CPI in January came in at a strong 0.8%, confirming the initial estimate. Last week, eurozone inflation for January was stronger than expected. Headline inflation jumped 0.9%, ending a nasty streak of five consecutive declines. The core reading jumped from 0.2% to 1.4%.

In the US, consumer inflation weakened in January, but not enough to have an impact on the US dollar. Headline inflation dropped from 0.4% to 0.3%, while Core CPI dipped to zero, down from 0.1%. Still, there are expectations that inflation will rise during the year, as the stimulus package becomes reality and as the US recovery gains traction.

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EUR/USD Technical

• EUR/USD is testing resistance at 1.2140. Above, there is resistance at 1.2231
• There is support at 1.1955, followed by a support line at 1.1861
• The pair is putting upward pressure on the 50-MA line, which is at 1.2152. A close above this line is a technical bearish signal

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