EUR/USD Set To Resume Falls After Short-Lived Bond Boost, Critical Support At Risk

Has euro/dollar suffered another dead cat bounce or a correction? Any answer to that question leaves the trend unchanged – to the downside. Tuesday’s ten-year bond auction drew enthusiasm from investors, cutting short the rally in yields.

The drop from 1.18% to 1.12% in Treasury returns triggered a dollar sell-off after several days – but that may already be over. Fresh demand for the greenback has sent EUR/USD below 1.22 and critical support at 1.2125 is again at risk.

Why is greenback performing such a rapid comeback? Federal Reserve officials have rejected the need to taper the bank’s bond-buying scheme – but they only talk of reducing the pace of printing dollars, not expanding it.

Fed Vice-Chair Richard Clarida and Governor Lael Brainard will be speaking later in the day. Any further mention of tapering may support the dollar – even though markets are waiting for a speech by Jerome Powell, the Fed Chairman.

Tensions are also growing ahead of President-elect Joe Biden’s address about the economy, also due out Thursday. The new administration is taking office next Wednesday and Treasury Secretary nominee Janet Yellen has confirmation hearings scheduled for Tuesday, raising hopes of immediate action. Investors expect Biden to announce a package worth around $3 trillion, but the scope is still to be seen.

The euro has its reasons to fall. Coronavirus continues raging in the old continent, with Spain’s caseload accelerating in recent days. Germany, the largest economy, is on course to extend the current restrictions beyond January and Italy’s coalition is fracturing in the middle of the winter wave – unhelpful in the middle of the pandemic.

The US also has an advantage over Europe on the vaccination front. Washington authorized releasing vaccines to anyone aged 65 or older. The world’s largest economy administered at least one dose to nearly 3% of the population while figures in European countries are barely around 1%.

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