Despite currency markets have been calmly observing the global stocks rout, the greenback managed to gain some support amid a widespread risk aversion this week. As a result, the euro is on the way to registers its worst weekly performance since October. Following a seven-week rally, EURUSD has retreated from highs above 1.25 hitting levels last seen back in mid-January around 1.22.
The overall sentiment around the USD remains bearish, and the currency’s positions are still fragile. For now, demand for the greenback is fuelled on the back of global equities plunge, as well as rising 10-year Treasury yields which may soon reach the 3% threshold. These are the key local factors preventing EURUSD from resuming the steady ascend, while the euro area fundamentals continue to support the EUR’s underlying bullish trend.
Therefore, as soon as panic in the world stock exchanges fades away, the pair will focus on the prospect for a more aggressive ECB tightening and will resume the dominant upside bias as Fed’s three hikes this year are already fully priced in. But the problem is that the global sell-off could continue for some time, may be until late this month, before a steady recovery takes place. So in the short-term, the EURUSD pair will likely continue to feel pressure from the greenback. At this stage, the price needs to hold above the 1.22 mark in order to avoid another sell-off.
By Helen Rush
Senior Analyst at Capital Markets