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

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.