EUR/USD Forecast: Euro set to resume falls after short-lived bond boost, critical support at risk

• EUR/USD has been recovering after a successful US bond auction lowered yields.
• Talk of Fed tapering, America's vaccination advantage, and US stimulus set to boost the dollar.
• Wednesday's four-hour chart is showing bears are in the lead.

Has euro/dollar suffered another dead cat bounce or a correction? Any answer to that question leaves the trend unchanged – to the downside. Tuesday's ten-year bond auction drew enthusiasm from investors, cutting short the rally in yields.

The drop from 1.18% to 1.12% in Treasury returns triggered a dollar sell-off after several days – but that may already be over. Fresh demand for the greenback has sent EUR/USD below 1.22 and critical support at 1.2125 is again at risk.

Why is greenback performing such a rapid comeback? Federal Reserve officials have rejected the need to taper the bank's bond-buying scheme – but they only talk of reducing the pace of printing dollars, not expanding it.

Fed Vice-Chair Richard Clarida and Governor Lael Brainard will be speaking later in the day. Any further mention of tapering may support the dollar – even though markets are waiting for a speech by Jerome Powell, the Fed Chairman.

Tensions are also growing ahead of President-elect Joe Biden's address about the economy, also due out Thursday. The new administration is taking office next Wednesday and Treasury Secretary nominee Janet Yellen has confirmation hearings scheduled for Tuesday, raising hopes of immediate action. Investors expect Biden to announce a package worth around $3 trillion, but the scope is still to be seen. 

More Extreme emotions are dollar-positive, where next from here?

The euro has its reasons to fall. Coronavirus continues raging in the old continent, with Spain's caseload accelerating in recent days. Germany, the largest economy, is on course to extend the current restrictions beyond January and Italy's coalition is fracturing in the middle of the winter wave – unhelpful in the middle of the pandemic.

The US also has an advantage over Europe on the vaccination front. Washington authorized releasing vaccines to anyone aged 65 or older. The world's largest economy administered at least one dose to nearly 3% of the population while figures in European countries are barely around 1%. 

 

Source: OurWorldInData

Later in the day, US inflation figures are of interest. The headline Consumer Price Index is set to edge higher, while Core CPI will likely remain at low levels. 

See US CPI December Preview: Markets take the Fed's cue and look away    

House Democrats are set to impeach President Donald Trump for incitement of insurrection as soon as Wednesday after Vice-President Mike Pence rejected using the 25th Amendment to oust his boss.

Markets continue shrugging off the political and drama. Growing security concerns around Biden's inauguration may darken the mood, but probably closer to the event. Any worsening in the market mood may boost the dollar.

All in all, euro/dollar has reasons to continue lower. 

More Extreme emotions are dollar-positive, where next from here?

EUR/USD Technical Analysis

Euro/dollar continues suffering from downside momentum on the four-hour chart and remains capped by the 100 and 200 Simple Moving Averages. It is still holding onto the 200 SMA and more importantly, the critical support line at 1.2125. That level is a triple bottom after cushioning EUR/USD twice in December and now in early January as well.

Below 1.2125, the next levels to watch are 1.21, 1.2075, and 1.2160. 

Resistance awaits at the daily high of 1.225, followed by 1.2240, which is where the 50 SMA hits the price. Further above, 1.2275 and 1.2310 await the currency pair. 

EUR/USD Price Forecast 2021: Euro-dollar long-term bullish breakout points to 1.2750