EUR/USD: the euro is starting to fight back

Against a backdrop of falling bond yields in the US, the euro began a sharp rebound against the dollar after the head of the Federal Reserve's San Francisco office made what she considered to be rather reassuring remarks. This was not enough to change the backdrop, the preferred working matrix, which remains a scenario of a tight monetary turn over this current year.

As for the euro, it benefited from encouraging statistical data to give itself more air. The final Eurozone manufacturing PMI data (IHS Markit) for January came in at 58.6, almost on target.

Chris Williams, chief economist at IHS Markit, offers the following insights: "Eurozone manufacturers appear to be in a better position to cope with the Omicron variant than in previous waves of the virus, with the latest PMI data reporting the strongest growth in output and order books for four months in January. The horizon has also brightened for businesses, with a slowdown in the rise in supplier delivery times boosting the morale of manufacturers, whose optimism has thus recovered to its highest level since June."

Williams warns, however, of the potential consequences of escalating geopolitical tensions between Moscow and Kiev, which along with "the energy price crisis and the risk of tighter monetary policies from global central banks have fuelled the headwinds to the region's growth prospects. Thus, despite easing tensions in global supply chains, conditions are likely to be less supportive of demand in the coming months."

Also released this morning, the Eurozone unemployment rate continued to fall, now at 6.9% of the labour force.

Still on the statistical front, traders were able to see the preliminary GDP data for the fourth quarter in the Eurozone on Monday, at +0.3%, slightly below expectations in quarterly terms. The rest of the week will be copious on this front, with Eurozone inflation figures today and the ADP survey on US jobs, the outcome of the ECB Governing Council meeting on Thursday and the monthly federal report on US employment on Friday.

The ISM Manufacturing PMI at 4pm and the JOLTS jobless claims at the same time are also due.

Right now, the pair is trading at $1.1280.

KEY CHART ELEMENTS
The break of $1.1260 has been accompanied by a powerful increase in volatility. The spot is now visiting levels not seen since the end of May 2020. As seen in the preamble, the exercise now consists of assessing what the shape of the upcoming consolidation could be in order to optimise a new bearish entry point. We prefer to stay out of the spot during this wait.

MEDIUM-TERM FORECAST
Given the key chart factors we have mentioned, our medium-term view on the EUR/USD is neutral.

We will maintain this neutral view as long as the EUR/USD is positioned between support at $1.1116 and resistance at $1.1360.