- EUR/USD struggles to rebound after dropping the most in three weeks.
- US Treasury yields stay sidelined around six-week top, German Bund coupons refreshed two-month high.
- Record high covid infections challenge health/economic systems but Fed rate-hike concerns stay on the table.
- Second-tier data may entertain traders ahead of FOMC Minutes, US NFP, risk catalysts are more important.
EUR/USD treads water around 1.1300 heading into Tuesday’s European session, following the heaviest daily fall since December 17. In doing so, the major currency pair tracks steady Treasury yields while waiting for second-tier data from Germany and the US.
US Treasury yields, German Bund coupons and the Wall Street benchmark together offered a rosy start to 2022. However, fears concerning the South African covid variant and financial market fears from China propelled the US Treasury yields more, which in turn favored the US Dollar Index (DXY) to gain more than what’s lost on Friday. Also favoring the greenback were the Reuters’ news saying, “Money markets have fully priced in a first U.S. rate increase by May, and two more by the end of 2022.”
It should be noted, though, that the recently sluggish bond markets seem to test the EUR/USD traders ahead of German Retail Sales for November, expected -0.5% MoM versus -0.3% prior, as well as the US ISM Manufacturing PMI for December, forecast 60.2 versus 61.1 prior figure.
Daily covid infections from Spain, France and the US keep refreshing all-time high in recent days. On top of that, the doubling of the virus numbers in the last few days also highlights Omicron's fears even as policymakers try to placate the bears.
Additionally, firmer US inflation expectations, as per the 10-Year Breakeven Inflation Rate numbers from the Federal Reserve Bank of St. Louis (FRED), jumped to a fresh high in six weeks to portray further prices pressure ahead, allowing Fed hawks to keep controls. The same adds strength to the US Treasury yields.
Elsewhere, chatters of relief in tax payment from Germany, in 2023, as well as French aid to companies hit by the pandemic, propel the European yields but fails to recall the EUR/USD buyers.
Above all, ECB v/s Fed story keeps EUR/USD sellers hopeful ahead of this week’s key economics and FOMC minutes. Given the higher odds of the Fed’s rate hike, each of the incoming data becomes important to watch.
Read: ISM Manufacturing PMI Preview: Low expectations in three figures open door to dollar upswing
Technical analysis
Not only the pullback from the 50-DMA level surrounding 1.1370 but a downbeat break of the 21-DMA, at 1.1310 by the press time, also keep EUR/USD sellers hopeful to test an ascending support line from November 24, close to 1.1255 at the latest.
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