EUR/USD Fundamental Outlook

Jan 12, 2021

EUR/USD Outlook: Bears await sustained break below 1.2130-25 support

EUR/USD witnessed some follow-through selling on Monday amid a broad-based USD strength. Rallying US bond yields continued underpinning the safe-haven USD amid softer risk sentiment. A sustained fall below the 1.2130-25 congestion zone should pave the way for further weakness.

The EUR/USD pair kicked off the new week on a downbeat note and dropped to three-week lows, around the 1.2130 region amid a broad-based US dollar strength. Hopes that President-elect Joe Biden would push for a multi-trillion-dollar stimulus package triggered a sudden pickup in the US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond saw its biggest weekly rise since June and forced investors to cover their bearish USD bets. Apart from this, a slight deterioration in the global risk sentiment provided an additional lift to the safe-haven greenback and contributed to the selling bias surrounding the major.

Investors remain concerns over the continuous surge in new coronavirus cases and the imposition of strict lockdown restrictions in Europe and China to fight against the new variants of the highly contagious disease. Adding to this, the US political uncertainty further dented investors appetite for perceived riskier assets. In fact, Democrats in the US House of Representatives plan to impeach the US President Donald Trump on Wednesday unless he steps down or is removed before then. Trump faces a single charge of inciting insurrection after a violent attack on the Capitol last week. That said, the market reaction, so far, has been limited.

On the economic data front, the Eurozone Sentix Investor Sentiment turned positive and improved to 1.3 in January from -2.7. Expectation index rose from 29.3 previous to an all-time high level of 33.5, albeit did little to impress the euro bulls. However, an intraday recovery in the US equity markets capped gains for the safe-haven USD and assisted the pair to find some support near the 1.2130 area. The pair, however, struggled to register any meaningful recovery and remained depressed for the fourth consecutive session on Tuesday.

In the absence of any major market-moving economic releases, the broader market risk sentiment and the US bond yields might continue to play a dominant role in influencing the USD price dynamics. This, in turn, might produce some meaningful trading opportunities around the major.

Short-term technical outlook 

From a technical perspective, some follow-through selling below the 1.2130-25 congestion zone will be seen as a fresh trigger for bearish traders and prompt some aggressive technical selling. The pair might then turn vulnerable to break below the 1.2100 mark and accelerate the corrective slide towards the 1.2060-40 region. The latter coincides with the 38.2% Fibonacci level of the 1.1603-1.2350 positive move and should now act as a key pivotal point for short-term traders.

On the flip side, the 23.6% Fibo. level, around the 1.2170-75 region, now seems to act as immediate resistance. This is closely followed by the 1.2200 mark, above which bulls are likely to push the pair back above the 1.2300 mark, towards testing the 1.2325-30 horizontal resistance.

Dollar follows Treasuries. Forecast of 12.01.2021 

Before you start rising, you need to get rid of everything, keeping you down, the ballast. The EURUSD correction has scared off some former bulls. What’s next? Let us discuss the Forex outlook and make up a EURUSD trading plan.

Weekly US dollar fundamental forecast

The dollar has become oversold, so, naturally, it should rise for some time. The rally of the Treasury yields encouraged speculators to exit short trades on the greenback, which have been expanding over the past few weeks and reached multi-year highs. Emerging markets currencies and the euro have suffered the most from the USD rebound. The EURUSD correction has questioned the former consensus forecast and even turned yesterday’s bulls into bears.

Morgan Stanley, which suggested at the end of 2020 that the US dollar should be 10% down over the next twelve months, now says the greenback has reached the bottom. New fiscal stimulus and the Fed’s discussion of monetary normalization, which could start already in June, will support the Treasury yield growth. I must admit the arguments are quite convincing: in my December euro price prediction, I noted that the EURUSD uptrend could turn down amid the talks about the federal funds rate hike, but I expected it to happen in late 2021. I still keep my point of view, the current euro’s drawdown is a normal correction, the pair should exceed the January highs before the uptrend reverses.

After Joe Biden promised trillions of dollars of additional assistance to the economy, the Treasury yields are rallying up. The rates on 10-year Treasuries have reached 1.158%, the highest value since February. Besides, Citi anticipates that the new fiscal stimulus will be $600 billion, Goldman Sachs expects $750 billion, and BofA Merrill Lynch – $1 trillion.

Projections for new stimulus package 

Weekly EURUSD trading plan:

I think the Fed is not concerned about the rise of the Treasury nominal yield, as the real yield is still low. The 10-year yield should be up to 1.6-1.8% to scare the Fed and the markets, which is yet unlikely. On the contrary, the idea of Trump’s impeachment could delay Congress’s consideration of Joe Biden’s stimulus offer, discourage the bears on the US Treasuries, and suspend the EURUSD correction. To buy the euro-dollar, we need additional signals. The first buy signal will be sent when the euro sellers fail to draw the price below the support zone of $1.212-$1.2145. If the price goes below the support zone, we shall pick up the rebound and buy the euro at a low price around $1.208 and $1.204.

EURUSD current rate in the Forex market:

EURUSD = 1.21581

Sell: 1.21581

Buy: 1.21581

Mood: 97.2%

1-day change: -0.18 (-0.0022%)