EUR/USD to break above 1.2055 as there is room for a downside correction in the dollar

EUR/USD dropped sharply in response to robust US retail sales and rising US yields. Yohay Elam, an Analyst at FXStreet, explains why bulls may come on top as three forces fight for influence.

Key quotes

“President Joe Biden continues pushing through his proposed $1.9 trillion coronavirus relief package. If Biden gets a smaller package – or any delay – would push investors back to bonds amid prospects of lower growth and less debt issuance. In turn, softer yields would make the dollar less attractive. All in all, progress on large stimulus is dollar positive and any road bumps would weigh on it.”

“The Federal Reserve's meeting minutes showed that the central bank is upbeat on America's growth prospects in 2021 – more than beforehand. However, the Fed seems unmoved from all the talk about higher inflation and is unlikely to raise rates nor taper its bond-buying scheme. Under these circumstances, the greenback will likely remain under pressure.”

“EUR/USD's most recent downward move was triggered by superb US Retail Sales – volume leaped by 5.3% in January, far above expectations. Some are concerned that this good news is bad news – as it may lower pressure for stimulus. However, unemployment remains high, with some ten million Americans still out of work. Weekly jobless claims are set to provide a reminder that the economy is still struggling.”

“Bears have taken over – EUR/USD has dropped below 1.2055, which has been serving as a separator of ranges since mid-January. The currency pair is now on the lower side of this critical barrier. Support awaits at 1.2020, the fresh trough, and then by the round 1.20 level. The aforementioned 1.2055 level now switches to resistance, and it is followed by 1.2080 and 1.2115.”