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Last week, short positions on the US currency reached the highest level in almost a decade. Since then, however, risk sentiment has eased somewhat, as investors have doubts about whether a large U.S. economic aid package can get through Congress and whether COVID-19 vaccines can turn the tide against the pandemic.
The cautious move to defensive assets pushed the USD index higher. It rose more than 0.1% the day before, growing above 90.4 points and reaching a nearly one-week high.
"Markets have come a long way hoping that the coronavirus will go away and national governments will spend a lot of money. However, progress in both subjects was at a standstill, and the markets went into a standby mode. A breakthrough on one of these issues is needed to give markets direction for the next couple of weeks," Westpac strategists said.
On Monday, key U.S. stock indexes fell sharply on news of potential obstacles to the adoption of a $1.9 trillion stimulus package in the United States. However, this failure was quickly redeemed, allowing the S&P 500 and Nasdaq to close the day higher.
A similar pattern was observed in the foreign exchange market.
Due to delays in the distribution of vaccines in the EU and against the background of falling morale of German businesses, the EUR/USD pair at the moment fell to 1.2120, but then it rebounded to 1.2145.
Business confidence in Germany fell to a six-month low in January, according to a survey conducted by the IFO Institute.
Meanwhile, AstraZeneca announced a significant reduction in the volume of deliveries of the COVID-19 vaccine to the EU in the first quarter of this year, due to a decrease in the amount of vaccine produced at the production facility within the European supply chain.
Vaccine manufacturers Biotech and Pfizer also announced a reduction in supplies due to construction work at a plant in Belgium.
The EUR/USD pair slipped to 1.2110 on Tuesday, but eventually recovered to 1.2170.
Reuters reported that Italian Prime Minister Giuseppe Conte has officially announced his resignation.
The reaction of the main currency pair to this statement was muted, as investors believe that the current situation is likely to lead to the formation of a new coalition government, and not to early elections in the country.
In addition, the market is focused on the Federal Reserve's two-day meeting on monetary policy, which starts today.
It is assumed that the US central bank will keep the interest rate at 0-0.25%, as well as leave the volume of the asset purchase program unchanged and confirm its commitment to an ultra-soft monetary policy.
As for the technical picture, attempts to push EUR/USD are likely to continue to receive strong resistance in the area of 1.2190-1.2200. Furthermore, the resistance is at the 1.2220 level, a clean breakdown of which will lead the pair to 1.2270 and 1.2300.
Meanwhile, the pair's unsuccessful attempts to attack the 1.2200 level can be regarded as a sign of fading bullish momentum. Investors will probably prefer to wait for the quotes to fall below the support area of 1.2075–1.2080 and only then will they open new positions for shorts. In this case, the levels 1.2000 and 1.1960 will come into play.
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