The EUR/USD pair lost its recent gains and retreated to 1.1300, only a few pips above its previous low.
After a week off, US traders returned to their desks and drove government bond rates to levels not seen since February 2020.
Interest Rates And COVID
On Wednesday, the return on the 10-year Treasury note hit 1.903%, as speculative activity mirrored concerns about rising inflation and the Federal Reserve’s raising rates sooner than expected. On Tuesday, the 2-year yielded 1% for the first time in two years.
But not only in America. The 10-year German bond yield went positive for the first time in over three years, with December’s inflation verified at 5.3% YoY.
In the EU, it was 5% over the same time, both multi-decade peaks. US inflation topped 7% in the same month, the most since 1982.
The near-term outlook is bleak. A COVID-19 epidemic hit the planet in March 2020, and the globe spent much of 2021 dealing with supply constraints and bottlenecks as the economy recovered.
In late November 2021, South Africa discovered a new coronavirus variant, Omicron. Three months ago, people had no idea that the new strain would cause unprecedented worldwide contagion, halting the economic recovery.
There were roughly 500K instances in December. In recent weeks, the number of new cases diagnosed globally has topped 3 million per day, including 1.35 million in the US. Several workers unable to come to the office are impacting businesses and hence economic growth.
Initial jobless claims for the week ending January 7 surged to 286K, far more than the projected 220K and the most since October.
Employment May Impede Policymakers
The two pillars of central bank policy are full employment and regulated inflation. The US Reserve Bank relied on “the job market nearing full employment” to expedite its financial support reductions to manage inflation.
The main issue is whether the Fed can move as planned if the employment market succumbs to the new coronavirus epidemic.
The Federal Reserve will meet next week and publish its decision on monetary policy on January 26. No movement is expected now, but market investors are looking for more clarity about future rate rises. Investors expect a March 2022 rate rise and three more raises during the year.
The ECB, on the other hand, is the polar opposite. While European officials acknowledge that stubbornly high inflation may remain longer than expected and perhaps beyond their comfort zone, they are nevertheless unwilling to withdraw financial support, opting for caution.
Upcoming Top US Events
The January ZEW Survey indicated that economic sentiment increased in the country and the union, despite a substantial contraction in the evaluation of the current situation. EU Consumer Sentiment came in at -8.5, stronger than anticipated.
Markit will release its January PMI estimates for the EU and the US next week. This week, Germany releases its January IFO Business Climate Survey and February GFK Consumer Confidence Index, and the EU releases its January Economic Sentiment Index.
The US will furnish top-tier numbers. The US calendar also features the first estimate of Q4 GDP, expected at 5.8% QoQ, and December Durables Orders. Inflation will be measured by the Fed’s preferred gauge, the Core Personal Expenditures Price Index.
EUR/USD Technical Forecast
EUR/USD CHART Source: Tradingview.com
Technically, the EUR/USD pair is set to resume its drop. On Friday, it closed at 1.1305, reaching the 23.6% retrace of its 1.1691/1.1185 drop, after hitting the 61.8% breakdown at 1.1495 the prior week.
On the weekly chart, SMA 20 has crossed beneath the longer ones and the Fibonacci opposition level, perhaps signaling heavy selling interest. Technical indicators, however, resumed their downward trend after reversing December’s oversold conditions.
The exchange is neutral to bearish on the daily chart, trading underneath a flat 20-SMA for the third day in a row, and the lengthier moving averages remain much below the present level. Simultaneously, technical indicators bounce around their midlines without direction.
A break of 1.1300 would favor a decline towards 1.1220, while a break of this level would favor a drop towards the 1.1160 price zone. A powerful stationary resistance level is 1.1385, trailed by 1.1440 and 1.1500.