EUR/USD – ECB Backed Support But Will It Last?

EUR/USD has failed to sustain prices above 1.1000 , but downside risks have been reduced. 

Whilst the initial rejection from the 1.1000 level may be seen as a ceiling from further upside, there are reasons as to why EUR/USD may be building a stronger support to move higher from.

The ECB has included a four-day inflation linked bond auction by Italy , aimed at retail markets that drew a record sale of EUR 22.3bn. It is clear that the actions from the ECB are imperative in providing stability for financial markets and drawing in foreign demand (Source: MUFG) .

Eurozone issuance has reached EUR 49.6bn this week versus last week at EUR 23bn.

A Germany and France recovery fund announcement saw BTP spreads fall. BTP spreads are a measure of Italian risk premiums vs Germany (as a benchmark). Generally speaker, a higher/tighter spread typically sees EUR/USD fall lower and vice versa. It is speculated this move could help the underperformance of eurozone equities vs US equities. If the ECB continue this support, it is likely BTP spreads will fall further and thus see EUR rising.

Moreover the Euro has been the worst performing G-10 currency in recent months with -21.6% versus a -12.6% peak in February 2020. Due to the sizable difference, there could be scope for prices to narrow down the difference slightly, bolstering EUR prices.