EUR/USD eases back towards 1.2100 following roller coaster Monday

• After a rollercoaster Monday, EUR/USD is easing back towards the 1.2100 level.
• The pair was dominated by USD flows on Monday, but attention turns to Eurozone events later in the week.
• A crucial ECB rate decision and EU Leader Summit are both scheduled for Thursday.

EUR/USD saw significant volatility on Monday, the pair taking its queue from fluctuations in USD and in EUR/GBP as Brexit optimism fluctuated between hope and despair. The pair briefly dropped below 1.2100 in the early part of the European session in tandem with extreme GBP weakness, only to reverse and almost reach last week’s highs in the 1.2170s, before easing back towards current levels just above 1.2100. The cross closed Monday trade with minor losses of about 10 pips or 0.1%.

Attention turns to ECB and EU Council Summit

Thursday will be a big for the Eurozone. The ECB are set to deliver a significant easing package, which most expect will amount to a (roughly) EUR 500B top up to the Pandemic Emergency Purchase Programme, which will allow purchases to continue for many more months (rather than the ECB increasing the monthly rate of purchases). Meanwhile, the bank is expected to also extend its targeted longer-term refinancing operations (TLTROs), and perhaps make them more accommodative. The key here (as a few ECB governing council members have explained recently) is to extend the duration of accommodative financial conditions to further assist the recovery in 2021 and beyond, rather than making financial conditions right now more accommodative.

Amid the recent improvement in global financial market conditions since Joe Biden won the US Presidential election and positive vaccine news in early November (despite the worsening state of the global Covid-19 pandemic as the North Hemisphere enters winter), the pressure on the ECB to over-deliver on market expectations has been lessened. Indeed, many analysts now see the risk of under-delivery as being higher than the risk of over, meaning the risks to EUR might lay somewhat tilted to the upside. Moreover, while the ECB is likely to take issue with recent EUR appreciation vs USD, the trade-weighted EUR is not as strong (still below summer highs), so any attempts to jawbone EUR lower might be taken with a pinch of salt.

Perhaps the more important event of the day for EUR will be the Summit of EU27 Leaders, which begins on Thursday and goes into Friday. Top of the agenda will of course be the issue of Brexit (can UK PM Boris Johnson and EU Commission President von der Leyen thrash out a deal prior to the summit?).

But the Polish/Hungarian veto against the EU Recovery Fund and 2021-2027 Budget will also be a hot topic. If a deal cannot be agreed with Hungary and Poland regarding the rule of law attachments being added to access to funding then the EU is threatening to go with “plan B”, which essentially could mean an EU-minus Poland and Hungary fiscal package. Poland and Hungary were set to be big net beneficiaries of the EU’s next-generation fiscal package, so time will tell if they cave into the pressure.