Monday was a volatile day on the market with a lot of noise and chaotic moves. The EUR/USD pair rejected a first advance towards the 1.20 mark, but the US dollar heads weaker into December. Risk aversion seems to fade as equity markets start a new month trading firmly in the green.
The EU–UK talks and Covid-19 headlines remain in the limelight. Other market movers to watch are the eurozone's November flash inflation numbers, and the ISM manufacturing survey. OPEC+ postponed its meeting to Thursday as cartel participants are unable to find common ground on delaying the planned output hike.
Another month of the US dollar decline
In November, the greenback lost ground once again as the risk appetite roared: Dow Jones Industrial average recorded the best month since 1987, and crude oil benchmarks advanced over 20%. The US dollar declined against all other developed market currencies. The Norwegian krone led the pack and skyrocketed by 7.5%. The Australian and New Zealand dollars jumped significantly as well. After reaching the 1.34 mark, the cable (the GBP/USD) traded sideways due to lingering EU-UK talks. Safe haven currencies posted only modest gains in extremely benign risk sentiment.
The magic of 1.20
The EUR/USD pair turned lower from the 1.20 boundary. This level is even more important as in September the European Central Bank Chief Economist Phillip Lane grumbled on the common currency's strength and consequently drew a line for its further advance. What matters for the monetary authorities are not just the levels but rather the dynamics of the exchange rate. In the last couple of weeks, the EUR/USD pair confirmed a medium-term floor at 1.16 and slowly advanced towards 1.20. In comparison to summer's jump, the recent move has to be described as anaemic.
Regardless, next Thursday the Governing Council will debate on how to boost growth using a wide range of tools. A central scenario assumes an expansion and extension of the Pandemic Emergency Purchases Programme combined with a new round of targeted Long Term Refinancing Operations. A rate cut is not completely off the table, however. The stronger the euro, the more aggressive easing might be delivered. Therefore, a sustained breach of the 1.20 level looks less probable than in any other circumstances despite the main currency pair trading within a stone's throw distance from the 1.20 mark.
Conotoxia research team