In this post, we’ll briefly look at how the EUR/USD performed across the month of January 2021. We’ll take a week-by-week look to help you understand how the fortunes of the EUR/USD twisted and turned as January kicked off the New Year.
January 1st week
The year 2021 kicked off with a bullish sentiment as far as the Euro was concerned. However, as Europe struggled with yet another wave of the COVID-19 pandemic, the sentiment was undermined, and it was put under pressure by the U.S. Dollar as the first week of 2021 commenced. As a result of the trend, bullish traders engaged in forex trading may have been encouraged to lighten up.
However, within a couple of days, the Euro surged again as the Democrats’ lead in terms of the runoff votes signalled the coming of the Joe Biden administration, which promised big spending. The assumption that the Democrats coming into power would enhance global economic growth played a key role in the surge.
Trader reaction to 1.2297 was seen as a key determiner in terms of the direction that the EUR/USD would go towards for the rest of the January 6 session. Buyer presence would have been indicated by a move over 1.2297. However, a move sustained below 1.2297 would have indicated seller presence.
January 2nd week
Fast forward a few more days, and the Euro was at its lowest since December 21, 2020. This was due to building pressure from the greater fiscal stimulus expectations in the U.S. along with widening yields for the U.S. treasury. At this point, the spread between the 10-year U.S. debt and the three-month U.S. debt was at 103 basis points. This was the steepest since March 2020, and many expected the figure to rise to 123 basis points, which was definitely a high as far as 2020 was concerned. 1.10% was the 10-year yield, which was the highest figure since March 19, 2020. 2.07% was the 10-year TIPS inflation break-even inflation rate, which was at its highest since November 2018.
These figures were helped by the promises of Joe Biden, who has sworn to inject trillions into the American economy to help it recover from the devastating economic effects of the COVID-19 pandemic. In ordinary circumstances, investors engaged in forex trading would have been quite worried about the rising inflation and its adverse effects on the U.S. Dollar. However, rising U.S. treasury yields did a lot to support the currency.
As the dollar trade clawed its way back into positive territory, the Euro took further hits well into the second week of January 2021. The 10-year U.S. Treasury yields saw a dip of over six basis points. The trader reaction would, once again, be of importance at this juncture. A move sustained below 1.2187 would have been indicative of stronger selling pressure. However, a move sustained above 1.2187 would have indicated buyer presence.
At this stage, all the price action suggested that the top players involved in forex trading would wait on the sidelines in expectations of the statements to be released by Joe Biden. The trends suggested that Biden promising too much would result in a fall of the EUR/USD because it would play a big part in a speedy economic recovery. This, in turn, would encourage the Fed in terms of ending their bond purchase stimulus quicker than expected.
January 3rd week
By the end of the 3rd week, the Euro traded higher against the U.S. Dollar. Christine Lagarde, the president of the European Central Bank (ECB), sounded a warning regarding the rising number of COVID-19 infections and the possibility of fresh restrictions that may present economic challenges. In terms of forex trading, it meant more bad news for the Euro. However, the wait for the fiscal stimulus from the Joe Biden administration meant higher yields of U.S. government bonds.
Interest rates were kept steady by the ECB, which also promised to provide greater support to the European economy if it was required. However, Euro traders paid little attention to the comments made by ECB president Lagarde. Most market participants had their eyes firmly focused on the global economy, which was slowly but surely recovering from the COVID-19 effect. Once again, Joe Biden’s $2 trillion stimulus package for the U.S. economy was at the centre of all the discussions among the Euro traders.
All in all, there still is a lot of uncertainty in terms of how the EUR/USD is going to fare in the coming months. However, there are promising signs, with Joe Biden’s stimulus package being the most prominent among them. Also, the vaccination drive for COVID-19 has already been initiated in several countries, and this could mean positives in the long run. But there’s also the fear of new surges in coronavirus cases due to the mutated strains that have been reported in various parts of the globe.
