EUR/USD testing its 200DMA around 1.1850

• EUR/USD has erased all of its Monday gains and some, falling all the way back to its 200DMA at 1.1850.
• The pair has fallen as a result of USD strength, with the buck in demand amid a defensive market tone.

It’s been a classic turnaround Tuesday for EUR/USD; the pair rallied from post-weekend opening levels around 1.1870 all the way to just shy of the 1.1950 mark on Friday but has since reversed course and dropped all the way back to the 1.1850 mark, which happens to coincide with the pair’s 200-day moving average (DMA). On the day, that amounts to a roughly 0.7% or 80 pip drop.

This is the first time that EUR/USD has tested its 200DMA since the end of May 2020. A break below this key area of support could open the flood gates for more selling and could see the pair drop all the way back to the 1.1600 area, the next area of notable support (the September and November 2020 lows).

Driving the day

The US dollar has been in the driving seat on Tuesday, gaining as the risk bias of the day has become increasingly defensive; as of right now, US equity markets are trading at lows or the day with the S&P 500 down about 1.0%, weighed by another sharp drop in crude oil prices (WTI has cratered another $4.0 or about 6.5% on the session) – markets continue to seemingly fret about the economic impact of the third Covid-19 wave in Europe, and this is coming as a benefit to save haven currencies like USD and JPY.

The euro is by no means the worst-performing currency in the G10 on the session. Indeed, the single currency is outperforming the likes of GBP, CHF, AUD and NZD. But the dollar’s advances have been relentless against (nearly) all comers, even despite the fact that US government bond yields have actually seen quite a sharp drop on the day, which (as has been the case over the last few weeks anyway) would typically be a USD negative.

Not the case on Tuesday – it seems markets are all about US exceptionalism; US data has been strong and is expected to be strong for the rest of the week, some Fed members are talking about hikes in 2022, US Treasury Secretary Janet Yellen is talking about a return to full employment by the end of 2022, and press reports suggest a big infrastructure package (worth between $3-$4T) is already in the works in Biden administration – all seemingly bullish factors for the dollar.

In terms of the latest news out of the Eurozone; Germany is set to extend its lockdown as expected, joining the likes of France, Italy and others as the third wave of Covid-19 infections in the bloc rises. Meanwhile, the EU’s spat with AstraZeneca (and by virtue anywhere the company exports its vaccines to, like the UK) continues as the bloc tries to revive its flagging vaccine rollout.

Looking ahead, Fed speak remains a key theme to watch stateside this week, as does US data in the form of preliminary March PMIs on Wednesday, weekly jobless claims on Thursday and February Core PCE inflation on Friday. Across the Atlantic, Wednesday’s preliminary Eurozone March PMI release will also be closely scrutinised, as will ECB speak and the meeting of EU 27 leaders on Thursday.