EUR/USD Down After Friday’s Relief Rally

  • EURUSD
    (${instrument.percentChange}%)

Covid Woes

Intense risk-off sentiment was witnessed on Friday, as markets reacted to news of a new Covid-19 variant, called Omicron, which the World Health Organization (WHO) characterized as a "variant of concern".

As per the relevant release "This variant has a large number of mutations, some of which are concerning. Preliminary evidence suggests an increased risk of reinfection with this variant..". [1]

Omicron was first reported to WHO from South Africa and has since been detected in various European countries, increasing fear, as the pandemic situation had already been worsening in various parts of the continent and leading to new travel restrictions.

EUR/USD Reaction

Fear led investors to safe havens such the Japanese yen, but the US Dollar dropped, since this situation poured cold water to heightened expectations for faster monetary tightening for the US Federal Reserve, amidst a backdrop of increasingly hawkish commentary from the bank.

Given this, the pair staged a solid recovery on Friday and managed close above key 1.1290-1.1304. This is supportive of further correction, initially towards 1.1374-9, but we are cautious at this stage.

As we argued on Friday though, "we doubt that risk aversion - and more so COVID-19 fears - can carry the common currency much higher". Furthermore, the last couple of days of the prior week were accompanied by thin trading conditions due to the Thanksgiving holiday in the US, giving us further reason for caution.

Despite last week's significant rebound, the pair returns to negative territory today, testing EMA100, while its Relative Strength Index (RSI) breaks below 50. This creates risk for a drop back towards last week's 2021 lows, but it is probably early for an extension of the brooder downtrend towards 1.1099.

As long as EUR/USD defends mid-1.1200s and EMA 100, near-term bias in on the upside and it can return above 1.1290-1.1304 and push towards 1.1374-9, as stated above.


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Fed Speak

The pair is at crossroads and we will be definitely looking for any comments from Fed officials to see if the new Covid variant has affected their thinking on the path of policy normalization. The US bank holds its next meeting on December 14-15 and the blackout period kicks-in on December 4.

If officials are now more worried about the pandemic situation and they want to tone down the increasingly hawkish rhetoric, this week is the one to do so. Chairman Powell stands out from today's Fed speakers, being on tap at 20:05 GMT.

Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 27 Jan 2022 https://www.who.int/news/item/26-11-2021-classification-of-omicron-(b.1.1.529)-sars-cov-2-variant-of-concern

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