The euro strengthened its positions against the US dollar after quite startling reports on the mood of the business circles in Germany and the eurozone. The data turned out to be much better than the forecasts of economists and exceeded all expectations. But before talking about the numbers and further prospects for the EUR/USD movement, I would like to briefly touch on the topic that will further limit the growth potential of risky assets.
It's about the coronavirus, news about which has become commonplace over the past year
German Chancellor Angela Merkel, on Tuesday, reiterated that she will hold talks on a possible extension of quarantine measures in the country and will insist on the introduction of a curfew. It is expected that the member states of the European Union will be warned that the measures they are resorting to in containing the coronavirus pandemic are clearly not enough. The risk is a new strain for which there is no vaccine yet.
EU Health Commissioner Stella Kyriakides told the EU Parliament that the bloc is still far from defeating the pandemic. According to the latest data, the European Union has not yet reached a plateau in the number of infections. However, Kyriakides said that "there is light at the end of the tunnel", as with two vaccines approved by the EU and a third that is about to be approved, things will go much better.
Hong Kong authorities are tightening social distancing measures and introducing special restrictions in certain areas where the maximum number of cases of the disease is recorded. A ban on entry has been introduced for travelers from Ireland and Brazil.
Meanwhile, the new administration of President-elect Joe Biden has rejected President Donald Trump's proposal to lift the travel ban for EU, UK, and Brazilian citizens.
Japan has confirmed three patients diagnosed with a new strain of coronavirus, which was first detected in the UK. Importantly, the said patients did not visit the UK.
Now, as for the statistics that led to such a sharp increase in the euro on Tuesday.
The data on inflation in Germany did not affect the market, as they coincided with the forecasts of economists. The Destatis report indicated that Germany's annual consumer price index was down 0.3% in December 2020, the same as in November. Energy prices fell immediately by 6.0%, which led to a fall for the second month in a row. Excluding energy prices, core inflation rose 0.4%. The fall in prices was also observed for clothing and footwear by 5.4%, while the cost of communication fell immediately by 3.4%. The rise in prices was observed in restaurants and hotels, as well as for alcoholic beverages and tobacco
On a monthly basis, consumer prices rose 0.5% in December 2020, in line with economists' forecasts and initial estimates. The EU-harmonized consumer price index fell 0.7% year on year. Compared to November, the index increased by 0.6%.
The biggest impact on risky assets came from the report from the Leibniz Centre for European Economic Research, which pointed to an increase in business sentiment in Germany. According to the data, sentiment has skyrocketed despite uncertainty over whether the quarantine will continue. Thus, the indicator of economic sentiment ZEW in January rose to 61.8 points and exceeded the forecast of economists, who expected that the index would be at 60 points.
The current situation index also rose slightly from negative to -66.4 points from -66.5 points in December. The index was forecast to fall to -68.5 points. The ZEW noted that export expectations rose significantly over the coming months
As for the general report for the eurozone, the growth of the index also came as a surprise. According to the data, the indicator of economic sentiment from the ZEW in the eurozone in January 2021 rose to 58.3 points against 54.4 points in December 2020. A sharp decline in the indicator was expected. The growth came in anticipation of new financial conditions that would help support businesses and companies, which would lead to an accelerated economic recovery from the pandemic.
The data on the current account surplus of the balance of payments of the European Central Bank worried few people, except for economists. According to the data, the surplus fell to €25 billion in November 2020 from €26 billion in October the same year. For the same period last year, the surplus amounted to €24 billion.
As for the technical picture of the EUR/USD pair, the bulls are clearly set for a breakout and consolidation above the resistance of 1.2140, which they approached very closely in the first half of the day. As I noted earlier, a confident breakout of this area will lead to a reversal of the downward trend, which will only strengthen the upward correction in risky assets. In this scenario, highs open around 1.2180 and 1.2220. If the pressure on the euro returns in the afternoon, the bears will need to put in a lot of effort to break and consolidate below the bottom of the 21st figure. Only a breakout of this area will quickly bring the euro down to a minimum of 1.2060 and allow counting on its renewal around 1.1990.