The EURUSD pair continues moving upwards on Thursday and reached 10-day highs above the 1.25 threshold recently, where the price met some supply on the back of a local USD demand. The euro has already recouped last week’s losses and looks set for further gains amid the persistent dollar weakness and growing expectations that higher euro area inflation will force the ECB to taper more aggressively.
Meanwhile, the longer-term fate of the single currency will be determined by the political climate in Germany. In particular, early next month we will know whether the members of Social Democratic Party approved the coalition deal. The verdict is due to be announced on March 4. By the way this is the day of general election in Italy, which can bring additional nervousness for the euro bulls. The negative German scenario could significantly undermine the EUR’s positions on the back of political uncertainty, which will likely reduce the appeal of the single currency.
In the short term the USD sentiment will continue to set the tone for EURUSD. In order not to lose its upside potential, the euro needs to stay above the 20-DMA in the 1.2360 area. Until the greenback receives a meaningful support from the US economic data, US Treasury yields, or another wave of a widespread risk aversion, the bullish risks for the pair will persist.
By Helen Rush
Senior Analyst at Capital Markets