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EUR/USD: US dollar’s victory is not an indication of the euro’s decline

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Relevance up to 06:00 2022-01-07 UTC+00

The US dollar started the year on a positive note, pulling the European currency upward, which is on the verge of falling again. At the same time, it seems that the never-ending imbalance in the EUR/USD pair is not an annoying misunderstanding, but an important step towards its further development.

January 2022 started with sharp growth for the US currency amid expectations of an increase in the Fed’s key rate and curtailment of stimulus. Market quotes have already incorporated the Fed’s key measures – the first rate hike by May and two more at the end of 2022. Later, the US dollar was expected to decline moderately, which did not affect the overall optimistic picture. At the same time, the dollar index has shown impressive daily gains for the last two months. A sharp rise in the yields of long-term US Treasury bonds, which increased by 12.5 points, reaching a record of 1.642%, primarily supported the US dollar. This is the highest figure since the end of November 2021.

On another note, the Euro currency has to defend its positions again in order not to be an outsider. European markets started the week with a moderate rise, gaining about 1%. On Tuesday morning, the euro traded around the level of 1.1306, exceeding the weekly low of 1.1279. The EUR/USD pair was moving around the range of 1.1303-1.1304, striving for new highs, but later lost its positions along the way.

Analysts said that the EUR/USD pair temporarily found itself in a bear trap at the beginning of the week but managed to get out of it. However, there is still bearish pressure on Tuesday, leaving the pair vulnerable to market volatility. Based on preliminary calculations, the temporary resistance line in the EUR/USD pair is located near 1.1398 (55-day SMA), and the next resistance level is at 1.1430. Its breakdown will significantly weaken the bearish pressure. The implementation of such a scenario in the short term will help the pair to reach new peaks.

Barclays Bank analysts stated that the aggressive scenario of rate hikes in the US is strong support for the US currency. Currency strategists assess such a development as the most likely. An additional catalyst for such growth may be the minutes of the Fed’s December meeting, which is expected to be published this week. According to experts, this will clarify the issue of raising rates by the Fed and the timing of stabilization of its balance sheet. On Friday, the Nonfarm Payrolls report will be released in the United States, demonstrating the change in the number of people employed in the non-agricultural sector of the country. Positive data will support the US dollar, which will pull up the euro again.

Many analysts are asking questions: is the current difficulties of the euro amid a winning US dollar a pattern? The situation is developing as it should, and so, will the periodic imbalances arising in the EUR/USD pair will not cause damage to the euro? The answer is yes at the moment. However, a moderately calm situation may completely change, and then the fragile balance in the EUR/USD pair will be disturbed.

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