• US Federal Reserve to discuss speeding up tapering this December.
  • Uncertainty surrounding the coronavirus Omicron variant is slowly receding.
  • EUR/USD is at risk of falling further as long as it holds below 1.1380.

The EUR/USD pair corrected oversold conditions and traded as high as 1.1382 but could not retain its gains and is ending the week pretty much unchanged around 1.1300.  The American dollar stands as the overall winner heading into the weekend, notably stronger against its high-yielding rivals but also higher vs the safe-haven gold.

Covid-related concerns and Powell

Market participants had to deal with loads of noise these last few days, which flooded financial markets with risk-off waves. The first round of concerns was triggered by a newly discovered coronavirus variant named Omicron. South Africa reported it on November 25, and global panic resulted in border closures and restrictive measures. As time went by, however, authorities acknowledged that Omicron had been circulating in Western Europe before the strain was identified.

Fears that the new variant may slow economic progress sent equities sharply lower, although there is a light of hope. Omicron seems more contagious but less aggressive, as cases reported so far are mild. JP Morgan said the variant might be the end of the pandemic, as the virus seems to be following the historical evolution pattern towards an endemic illness. “Omicron could be a catalyst for steepening (not flattening) the yield curve, rotation from growth to value,” the strategists said. Additionally, experts believe that vaccines will still offer protection against severe cases and death.  The WHO remains cautious as there are a lot of unknowns surrounding the new strain, with a clearer picture expected by mid-December.

US Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen, meanwhile, testified on the CARES act before the Senate. Powell noted that inflation had spread more broadly and that the risk of persistent inflation has risen. He added that it's time to remove the term “transitory” to describe price pressures, and the Fed would discuss speeding up tapering in their December meeting, to counter inflation.

Covid-related concerns and Powell’s testimony sent Wall Street nose-diving and helped the greenback to retain its strength.

Inflation and employment in the eye of the storm

European data has kept reflecting the Union’s struggle to return to a path of growth, as inflation keeps rallying to record levels. According to preliminary estimates, the German Consumer Price Index reached a record of 6% YoY in November. The figure only confirmed what market participants already knew, as EU inflation stands at a multi-year high. And while the US Federal Reserve has finally shown signs of real concern, the European Central Bank maintains its wait-and-see stand. On Thursday, European policymaker Fabio Panetta said that inflation and the new pandemic wave is endangering the Union’s recovery at an early stage, although earlier this week, he noted that there’s no need to tighten monetary policy to control inflation, driven by temporary factors.  

On Friday, the US published the Nonfarm Payrolls report, which showed that the country added just 210,000 new jobs in November, much worse than anticipated. The unemployment rate contracted to 4.2%, better than the 4.5% expected, while the Participation Rate jumped to 61.8%. The report put mild pressure on the greenback heading into the weekly close, but the impact was quite limited. The US is still 4 million jobs short of pre-pandemic levels.

The second week of December will bring updates on already published data, which means the macroeconomic calendar will likely have a limited impact on price action, this could be even more the case considering the upcoming central bank decisions just before the winter holidays.

The EU will publish the final reading of  Q3 Gross Domestic Product, while Germany will release the December ZEW Survey on Economic Sentiment and November final inflation figures. The US will also publish the November Consumer Price Index, which is expected to be downwardly revised to 5.8% YoY from 6.2%.

EUR/USD technical outlook

The EUR/USD pair posted a lower low and a lower high during the week, retreating from the 38.2% retracement of the 1.1691/1.1185 slide at 1.1380. A break above the latter could confirm an interim bottom and hint at further gains ahead, although that’s not the case at this stage.

The pair is hovering around the 23.6% retracement of the mentioned decline, while technical readings in the weekly chart hint at persistent bearish strength. EUR/USD is developing below all of its moving averages, with the 20 SMA heading firmly lower, and about to cross below the 100 SMA for the first time since August 2020. At the same time, the Momentum indicator heads south within negative levels as the RSI indicator consolidates around 30.

The daily chart shows that bears retain control of the pair, which has steadily retreated from a sharply bearish 20 SMA. The Momentum indicator has extended its advance within negative levels but remains below its midline, while the RSI indicator is flat at around 41, reflecting the absence of buying interest. Overall, the pair is poised to extend its slump, with a possible target at around 1.1160, a strong static support area. A break below 1.1270 should open the door for such a decline.

The main resistance is 1.1380, the mentioned Fibonacci resistance level, followed by a long term static one at 1.1470.

 

EUR/USD sentiment poll

According to the FXStreet Forecast Poll, EUR/USD is set to fall further in the near term, as it is seen down by 47% of the polled experts on a weekly basis, down to 1.1246 on average. Bulls become a majority in the monthly and quarterly views, with the pair seen then above the 1.13 but below 1.14.

The Overview chart shows that moving averages maintain their bearish slopes, despite the average higher targets. The firmer bearish stance is the quarterly one, with most targets accumulating below the 1.1400 figure. 

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