“While looking back, things look quite straightforward and logical especially in markets” – Anonyms
Globally, EUR/USD surged past 1.20 handle as it broke multiple resistances, including falling monthly trend-line from 2011. Over the past one month, the EUR/USD pair has been gaining momentum as pair gained more than 450 pips from its post-US election low of 1.1602. Just to be clear, the surge in Euro has a very little contribution from the European economy, which continue to struggle amid Covid crisis. Euro Area’s service PMI remained below 50 at 41.3 levels, while manufacturing PMI improved to 53.6. November German Ifo business climate released at 90.7 levels, lower than October and pre-covid levels.
The surge in Euro can be explained better from improved risk appetite of global investors. CBOE volatility index VIX, has an inverse relationship with risk appetite, crashed to 20.77% lowest since 24th Feb (Start of Covid sell-off). In last one month, US S&P index has gained more than 10% from 3300 to 3663 levels indicating significant rally in stock prices, which can be attributed unrealized tail risk from US election and optimism from Vaccine results. The gain in euro, obviously means, much-awaited breakdown in US dollar index. US dollar index broke down key support levels 91.70-91.90 zone. The structural decline in US dollar index can also be attributed to overtly dovish Fed and lack of inflation risk in the economy.
Technically, the break of 1.20 handle seems quite significant on EUR/USD chart and there is a possibility of another leg of movement till 1.23-1.24 levels. As US dollar index has next significant support near 88.50-89.00 levels, there is space of nearly 3% decline in US dollar index. It is noteworthy that ECB has been a bit uncomfortable from the surge in Euro in the past. ECB policy, next week, can be a key trigger for the pair.
On domestic front, there have been multiple positive factors underplay like improving current account, robust FIIs and FDIs flows and weak US dollar. Despite all this, Rupee appreciation has been relatively mild as RBI has been building FX reserve at an electric pace. Technically, USDINR pair has multiple support b/w 73.15 to 73.50 levels. As always, appreciation rupee will remain at mercy of mint street.
