EUR/USD challenges 2-day highs near 1.1230, looks to ECB

• EUR/USD gathers upside traction and advances to 1.1230.
• Markets’ attention remains on the strong pick-up in COVID cases.
• ECB’s Lagarde, Schnabel, Panetta, De Guindos all due to speak later.

The single currency extends the optimism in the second half of the week and lifts EUR/USD to the 1.1230 area on Friday.

EUR/USD looks to yields, ECB

EUR/USD advances for the second session in a row on Friday on the back of the renewed knee-jerk in the dollar and amidst increasing risk-off sentiment sustained by coronavirus concerns.

Indeed, several European countries continue to report a fast rebound in COVID cases and open the door to fresh lockdown measures in the very near term and with the main impact expected on the economic activity just ahead of the Christmas festivities.

In the docket, German Import Prices surprised to the upside in October, rising 3.8% MoM and 21.7% from a year earlier. Later in the day, Chairwoman Lagarde is due to speak followed by Board members Schnabel, Panetta and De Guindos.

What to look for around EUR

EUR/USD seems to have found some contention in the 1.1190/85, or fresh cycle lows, so far this week. The pair continues to suffer the ECB-Fed policy divergence, while the sharp increase in COVID-19 cases in Europe also adds to the deteriorated outlook for the single currency in the last part of the year. Also weighing on the pair, the loss of momentum in the economic recovery in the euro area - as per some weakness observed in key fundamentals – is also seen pouring cold water over investors’ optimism on the economic recovery.

Key events in the euro area this week: ECB’s Lagarde (Friday).

Eminent issues on the back boiler: Asymmetric economic recovery post-pandemic in the region. Increasing likelihood that elevated inflation could last longer. Pick-up in the political effervescence around the EU Recovery Fund in light of the rising conflict between the EU, Poland and Hungary on the rule of law. ECB tapering speculations.

EUR/USD levels to watch

So far, spot is gaining 0.25% at 1.1234 and faces the next up barrier at 1.1277 (10-day SMA) followed by 1.1374 (high November 18) and finally 1.1412 (20-day SMA). On the other hand, a break below 1.1186 (2021 low Nov.24) would target 1.1185 (monthly low Jul.1 2020) en route to 1.1168 (low Jun.19 2020).