EUR/USD: COVID-19 concerns and ECB policy review pose downside risks – MUFG

Broad-based US dollar strength has helped to drag EUR/USD back below the 1.1800-level for the first time since late March/early April. Concerns over the spread of the Delta covid variant and the ECB's strategic review point lower.

The EUR is also coming under more downward pressure against the yen

“Investor sentiment towards the euro is being undermined as well by the recent pick up in COVID cases in eurozone. New cases have picked up sharply at the start of Q3 after falling throughout Q2. The spread of the new Delta variant will heighten fears that the economic re-opening in the eurozone could be delayed, posing downside risks to the economic recovery and the euro.” 

“It has been reported overnight that the ECB have agreed on a new inflation goal following their recent monetary policy review. According to reports, the ECB have agreed to raise their inflation goal to 2% and allow room to overshoot it when needed.” 

“We expect market participants will be sceptical as well over the ECB’s ability to generate an inflation overshoot compared to the Fed. As a result, the ECB should have less success than the Fed at attempting to lift inflation expectations and lowering real yields. On balance though it is another negative development for the euro but is unlikely to be a game changer at the current juncture.”

“In March, the EUR/USD pair hit an intra-day low of 1.1704 before rebounding which provides the next key support level.”

“A break below the 130.00-level for EUR/JPY would open the door to an accelerated sell off towards support from the 200-day moving average at just above the 128.00-level. Market participants have been positioned heavily short the yen and long the euro, and could be forced to cut back those positions if recent price continues reinforcing spot price momentum.”