At the end of last week’s trading, the EUR/USD tried to compensate for some of its recent losses that sent the pair to the 1.1186 support level, its lowest since July 2020. Rebound gains went to the 1.1330 level. The pair avoided the bearish weekly closing, but it did not change the general trend, which is still bearish. The divergence in economic performance and the future of monetary policy tightening between the Eurozone and the United States, along with fears of severe waves of coronavirus infections, led by Europe, are still in favor of the dollar’s strength.
After the latest performance, some analysts believe that the single European currency, the euro, may now be close to drawing a line below a nearly year-long sell-off. The euro rose at the end of last week's trading, along with other low-yielding "funding currencies" such as the Japanese yen and the Swiss franc, as global markets collapsed in what appeared to be a response to a new variant of the coronavirus being discovered in Africa.
The EUR/USD briefly fell below the 1.12 support last week as the dollar surged to new highs in response to signs of an additional “toughening” shift in the Fed's policy stance, although there were recent doubts released.
Commenting on the performance, Jane Foley, Head of FX Analysis at Rabobank, said, “Based against the still dovish ECB, the Fed's tightening has been and remains a positive factor for the US dollar. However, how much the US dollar will react to this news depends on what is actually priced. In the medium term, we continue to favor the US dollar. However, as the market is now long for the US dollar and the euro short, and the money market is in a very strong position to raise the Fed rates next year, there is room for a pullback in the currency pair.”
As of Friday, there appeared to be an increased risk that the US Federal Reserve would end its quantitative easing program at a faster pace than was chosen at the November meeting and raise interest rates sooner than directed, despite market expectations for the US interest rate. It was subsiding on Friday.
The latest performance is under threat, with a return to varying degrees of "lockdown" and the imposition of stricter restrictions in countries such as the Czech Republic, Slovakia, Portugal, Austria and the Netherlands. This has raised concerns in some parts that other countries may soon follow suit which has weighed heavily on the EUR in recent weeks. For the forecast, BMO Bank analysts see in their forecast review: “We offered 3 million EUR/USD to move towards the 1.10 support, followed by a relatively flat picture of the pair after that.”
ECB's Isabelle Schnabel and Klaas Knott's acknowledgment on Tuesday of increased upside risks to inflation expectations offered temporary support for the euro last week, and ECB policy is now likely to have less counter-influencing effect on the euro. Two European Central Bank policymakers acknowledged that short- and medium-term inflation expectations may need to be revised higher in December and suggested that the ECB's pandemic-inspired quantitative easing program likely expires in March 2022, although the implications for that are not straightforward.
Despite the recent rebound, the general trend of the EUR/USD is still bearish, and stability below the 1.1300 support still opens up for a more bearish move to lower support levels, the closest of which are 1.1245, 1.1180 and 1.1070. On the upside, the pair's gains will remain subject to selling and may not exceed the resistance levels of 1.1385, 1.1420 and 1.1500.
Today, the EUR/USD pair will focus on the comments of monetary policy officials, includng Christine Lagarde of the European Central Bank and Jerome Powell of the US Federal Reserve. This is in addition to investor and market sentiment towards global restrictions to contain the pandemic.