|premium|

EUR/USD Forecast: Euro set to dive after dead cat bounce as new covid strain panic not over yet

  • EUR/USD has tumbled amid fears of a new coronavirus variant. 
  • Fears of the strain's spread in Europe set to overcome US stimulus deal and other upbeat developments.
  • Monday's four-hour chart is showing bulls are still in the lead.

Is ignorance bliss? Probably not for the euro, at least in the short term. The new COVID-19 strain that has been identified in the UK is causing panic – most European countries have reacted swiftly with bans on travel to and from the UK.

The variant has a transmissibility rate that could be 70% higher than what was known so far, albeit probably not more lethal nor vaccine-resistant. However, this is far from being a British problem.

First, Italy also reported a case of a person carrying that covid mutation. Secondly, the UK is far ahead of other countries in genetic sequencing. It is likely that the strain is circulating in Europe. Once laboratories identify it elsewhere, it could weigh on the euro as well.

The good news for the common currency – and for broader markets – is that the level of panic may be exaggerated. It is unclear if the new covid strain is the sole culprit of London's quick transmission. Residents in the dense capital are suffering from pandemic fatigue and have been busy doing Christmas shopping. 

On the other side of the Atlantic, Democrats, and Republicans finally struck a fiscal relief deal worth $900 billion. It does include the thorny issues of state aid or liability waivers – nor a last-minute attempt by the GOP to curb the Federal Reserve's lending powers. The move came after a long weekend of talks and is now in the final drafting phase. The upbeat development is liming the market downfall. 

Other positive developments come from the vaccine front. The European Medicines Agency is set to approve the Pfizer/BioNTech jab on Monday, the same day that the US already kicks of administering Moderna's inoculation. America's Food and Drugs Administration gave the green light to this second vaccine on Friday.

On the other hand, the other EU-UK issue is far from being resolved – Brexit. Brussels and London remain apart on fisheries and also on other topics with ten days to go. 

Overall, there is more room to the downside once the strain of the virus is widespread in the eurozone – but perhaps followed by a more significant recovery later on. In the short run, EUR/USD attempts at recapturing 1.22 look like a "dead-cat bounce" – a small rise followed by another dive. 

EUR/USD Technical Analysis

Euro/dollar still benefits from upside momentum and has been holding above the 50 Simple Moving Average on the four-hour chart. The Relative Strength Index dropped from near overbought territory to balanced conditions.

Immediate support is at the daily low of 1.2168, followed by 1.2125, which was a swing low last week. It is followed by 1.21 and 1.2060. 

Some resistance is at 1.2210, a swing high last week, followed by 1.2240 and 1.2275, the 2020 peak. 

Premium

You have reached your limit of 3 free articles for this month.

Start your subscription and get access to all our original articles.

Subscribe to PremiumSign In

Author

Yohay Elam

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

More from Yohay Elam
Share:

Editor's Picks

EUR/USD eases marginally, back to 1.1800

EUR/USD navigates a narrow range on Thursday, hovering around the 1.1800 neighbourhood in a context of humble gains in the US Dollar. The pair’s lacklustre performance come amid the unabated trade uncertainty, geopolitical tensions in the Middle East and the cautious tone from the ECB’s Lagarde.

GBP/USD retreats from tops, approaching 1.3540

GBP/USD partially sets aside Wednesday’s strong advance and recedes to the 1.3540 region on Thursday. Cable’s modest retracement follows the equally acceptable gains in the Greenback, while investors continue to pencil in a potential BoE rate cut in March.

Gold clings to gains just below $5,200, focus on geopolitics

Gold is edging modestly higher on Thursday, adding to Wednesday’s uptick and holding just below the $5,200 mark per troy ounce against the backdrop of modest gains in the US Dollar. In the meantime, attention is turning to the geopolitical scenario following US-Iran nuclear talks.

Stellar: Relief bounce fades as bearish undertone persists

Stellar is trading around $0.16 at the time of writing on Thursday after rebounding more than 8% in the previous day. Derivatives data paints a negative picture as XLM’s short bets hit a monthly high while Open Interest continues to decline.

The one thing everyone is on the lookout for is US action of some sort against Iran

The FX market is minestrone soup these days. It is befuddled by conflicting data, rumors and small stories exaggerated out of proportion, and Trump-generated uncertainty. 

Bitcoin steadies as traders eye US–Iran talks

Bitcoin (BTC) price is stabilizing around $68,000 at the time of writing on Thursday after a 6.2% relief rally the previous day amid a broader downward trend.