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EUR/USD Forecast: Bulls could aim to reclaim 1.2400 mark amid US stimulus hopes

  • Sustained USD selling assisted EUR/USD to gain traction for the third straight session on Wednesday.
  • The euro bulls seemed rather unaffected by the downward revision of the Eurozone Services PMIs.
  • Disappointing US ADP report, FOMC minutes did little to impress the USD bulls or cap the major.

The EUR/USD pair shot to fresh 33-month tops on Wednesday amid sustained US dollar selling bias. The market started pricing in the possibility of a more expansive fiscal policy in the wake of a Democratic victory in the crucial US Senate runoff elections in the state of Georgia. A 'blue wave' will allow incoming President Joe Biden to pursue his preferred economic policies, which, in turn, was seen as a key factor that continued weighing on the greenback.

On the other hand, the shared currency seemed rather unaffected by dismal Eurozone data. In fact, the final version of Markit’s Services PMI indicated that economic activity in Eurozone contracted for the second successive month in December and more sharply than originally estimated. The situation is expected to get worse amid renewed coronavirus-induced lockdowns in the region. Apart from this, Germany published the flash estimate of December inflation figures and showed consumer prices are expected to rise by 0.5%, drop 0.3% YoY in December.

Meanwhile, expectations of larger government borrowing pushed the benchmark 10-year US Treasury yield beyond 1.0% mark for the first time since March and helped ease the USD bearish pressure. Investors also seemed worried about the prospect for tighter regulations on technology mega-caps. This led to a selloff in Nasdaq futures, which assisted the safe-haven greenback to stage a modest intraday bounce and prompted some selling around the major.

The attempted USD recovery quickly ran out of the steam following the disappointing release of the ADP report, which showed that employment in the US private sector decreased by 123K in December. The reading was worse than November's 304K and also missed expectations by a big margin. Separately, the minutes from the Fed's meeting last month revealed unanimous support to keep the bond-buying program unchanged and that some members are in favour of expanding stimulus. The minutes, however, did little to provide any respite to the USD bulls.

The pair finally settled with modest gains for the third consecutive session, albeit lacked any strong follow-through buying amid rallying US bond yields. The pair edged lower during the Asian session on Thursday and was last seen trading just above the 1.2300 mark. The downside, however, is likely to remain limited amid hopes for additional US financial aid package and a strong global economic growth in 2021, which should continue to undermine the greenback.

Market participants now look forward to the flash Eurozone CPI figures for a fresh impetus. The US economic docket highlights the releases of the usual Initial Weekly Jobless Claims and ISM Services PMI. The data, along with the broader market risk sentiment, might influence the USD price dynamics and allow investors to grab some meaningful trading opportunities.

Short-term technical outlook

From a technical perspective, the overnight move beyond the previous double-top resistance near the 1.2310 region might have already set the stage for additional gains. With technical indicators on the daily chart still far from being in the overbought territory, the pair seems all set to prolong the upward trajectory and aim to reclaim the 1.2400 round-figure mark for the first time since April 2018.

On the flip side, any subsequent slide below the 1.2300 mark might now be seen as a buying opportunity and remain limited near the 1.2255-50 region. The latter marks a near three-week-old ascending trend-line and should now act as a key pivotal point for short-term traders. A convincing break below might turn the pair vulnerable to slide below the 1.2200 mark and test the next major support near the 1.2130-25 congestion zone.

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Haresh Menghani

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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