EUR/USD Forecast: Euro faces two-way risk on Omicron fears

  • EUR/USD has lost its bullish momentum following Friday's decisive rebound.
  • New coronavirus variant already detected in several European countries.
  • 1.1240 aligns as key support for EUR/USD in near term.

EUR/USD has staged a decisive rebound on Friday and climbed above 1.1300 before reversing its direction on Monday. The common currency is struggling to find demand as the detection of the coronavirus Omicron variant in several European countries revive concerns over tighter restrictions and lockdowns. On the other hand, the greenback remains at the mercy of the market pricing of the Fed's rate outlook.

Over the weekend, the Netherlands reported 13 confirmed cases of the Omicron variant. Austria, Belgium, Denmark, Italy and Germany are among the other European countries that detected the virus. 

The World Health Organization (WHO) warned on Monday that Omicron has an unprecedented number of spike mutations, some of which are concerning for their potential impact on the trajectory of the pandemic.

The euro could have a tough time outperforming the dollar if additional measures are introduced in Europe to curb the spread of the new variant. Meanwhile, Germany's Destatis will release the preliminary November Consumer Price Index (CPI) data later in the session. European Central Bank (ECB) executive board member Isabel Schnabel said on Monday that they think inflation has peaked in November.

There won't be any high-tier data releases from the US and investors will keep a close eye on the US Treasury bond yields. On Friday, the benchmark 10-year US T-bond yield fell nearly 10% as investors reassessed the odds of the Fed tightening its policy sooner than expected.

At the time of press, the CME Group's FedWatch Tool shows that there is a 34.7% probability of the Fed leaving its policy rate unchanged by June 2022, compared to 23.4% last Monday. Currently, the 10-year US T-bond yield is staying in the positive territory above 1.5% but another wave of risk-aversion could trigger one more leg lower in yields and hurt the dollar.

EUR/USD Technical Analysis

On the four-hour chart, EUR/USD is holding near the 50-period SMA at 1.1270. Below that level, 1.1240 (20-period SMA) aligns as the next key support. As long as buyers continue to defend this level, additional gains in the near term could be witnessed.

On the upside, 1.1320 (static level) could be seen as first resistance. In case this level turns into support, 1.1350 (Fibonacci 38.2% retracement level of the November downtrend) could be targeted ahead of 1.1380 (50-period SMA). 

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