Market recap: European stocks turned higher after a weaker start, following a similar pattern for Chinese markets overnight. AstraZeneca was leading the gains for the FTSE ahead of highly anticipated results from early vaccine studies, while supermarkets were dominating the bottom half. But it was the German DAX which was once again outperforming. Crude oil prices pared some of their earlier losses, after falling for the third straight session. Gold and silver edged higher, as the dollar started the new week how it ended the last one: lower. The weaker greenback saw the like of the GBP/USD and EUR/USD break sharply higher.
The euro was leading the gains after European leaders made progress in negotiating a historic stimulus package, according to media reports. This also explains why the DAX has also been outperforming, and why Italy’s borrowing costs fell to their lowest since early March today as the rally in riskier eurozone government debt saw the spread between Italian 10-year and German bund yields, an important gauge of risk in the region, tighten.
EU leaders were preparing to resume talks on Monday afternoon for what should have been a two-day event turned to four due to deep ideological differences between some of the nations fighting over €750 coronavirus recovery fund. But judging by this morning’s price action e.eg. in EUR/USD, investors believe a deal is imminent. The €750 billion stimulus is going to help speed up the recovery in the euro area, where the virus situation also appears to be under control compared to the US. Investors are therefore anticipating the eurozone to perform relatively better than the US economy, driving the exchange rate higher. However, this is a global issue and if the vaccines prove not to be very effective and coronavirus does not go away, then we may well see haven demand come back for the US dollar and undermine risk assets, including the EUR/USD. But that’s a worry for another day and right now the path of least resistance is to the upside:
Tracking the movement in the German-Italian yield spread, the EUR/USD has broken to its highest level since March. From a technical point of view, a push to 1.1500 looks likely given the nature of the recent bullish price action. For that to happen the bulls will need to be able to hold the breakout above the most recent resistance range between 1.1420 and 1.1450, now the first line of support. Any move back below this area would be a bearish development, especially if we go below the most recent low at 1.1370. For as long as that doesn’t happen then the path of least resistance would remain to the upside.
