EUR/USD suffered heavy losses on Wednesday and continues to edge lower toward 1.1200 early Thursday. According to economists at Westpac, divergence in central bank policy is likely to limit any EUR rallies and maintain the downtrend in EUR/USD at least into ECB’s key March policy meeting.

EUR-USD 2yr Swaps Spread suggests a lower path for EUR/USD

“The chart of the EU-US 2yr swap spread clearly shows the directional pull of this divergence. This looks set to continue, at least until ECB’s allotted end of PEPP and reappraisal of policy and economic projections in March.”

“Germany’s transition of power from Merkel to Scholzled government was expected to be smooth and have little market impact. The risk of a change in French leadership may not be so smooth but is an issue for Q2 22. Italy may also face a change in leadership.” 

“January’s failure of EUR/USD to hold above 1.14 could trigger a retest 1.1200, or even 1.1000-50 area.”