EUR/USD Forecast: Possible false breakout setup warrants caution for bulls

• EUR/USD witnessed some profit-taking on Monday amid a strong pickup in the USD demand.
• The risk-on mood-led rally in the US bond yields prompted some USD short-covering bounce.
• The pair showed resilience below the 1.1800 mark, warranting caution for bearish traders.

The EUR/USD pair kicked off the new week on a positive note and climbed to over two-month tops, around the 1.1920 region, albeit struggled to capitalize on the move. Joe Biden’s victory in a nail-biting US presidential election kept the US dollar bulls on the defensive, which was seen as a key factor behind the early uptick.

Adding to this, a promising development over a potential vaccine for the highly contagious coronavirus disease provided an additional boost to the already upbeat market mood. Pfizer and BioNTech announced that a large-scale clinical trial showed their experimental vaccine was more than 90% effective in preventing COVID-19.

This was seen as a major victory in the fight against the highly contagious disease and revived hopes for a swift global economic recovery. The strong risk-on flow triggered a massive rally in the US Treasury bond yields, which, in turn, prompted investors to unwind their bearish USD positions and exerted some pressure on the major.

The pair dived around 125 pips from daily swing highs and momentarily slipped back below the 1.1800 mark, though showed some resilience at lower levels. The latest optimism turned out to be short-lived and was evident from a pullback in the equity markets. Investors remain sceptic about the efficacy and the length of immunity provided by the vaccine.

The cautious mood was further reinforced by a fresh leg down in the US bond yields, which undermined the greenback and assisted the pair to regain some positive traction during the Asian session on Tuesday. Market participants now look forward to the release of the German ZEW Survey for some impetus. On the other hand, moves in the US bond market and the broader market risk sentiment will influence the USD price dynamics, which should further assist traders to grab some meaningful opportunities.

Short-term technical outlook

From a technical perspective, the overnight sharp retracement might have turned the recent move beyond a two-month-old trading range as a false breakout. That said, it will still be prudent to wait for some follow-through selling below the 1.1800-1.1795 region before confirming that the pair might have topped out in the near-term. The pair might then turn vulnerable to accelerate the slide back towards testing the 1.1700 mark. The downward trajectory could further get extended towards 100-day SMA support, currently near the 1.1650-45 region.

On the flip side, the 1.1855-60 region, which is closely followed by the 1.1880-85 support zone might now act as immediate resistance. A sustained strength beyond, leading to a subsequent move above the overnight swing high, around the 1.1920 region, has the potential lift the pair beyond the 1.1945-40 supply zone, towards reclaiming the key 1.2000 psychological mark.