29.12.202115:15 Forex Analysis & Reviews: Euro could go down after holiday season

The market remains quiet in the run-up to the New Year's Eve. Trading could pick up only after January 3.

EUR/USD is drifting sideways in the 1.1290-1.1345 range and would likely continue hovering near 1.1330 until the end of the year. Falling US futures pushed the euro down during the American session on Tuesday. The European currency bounced back along with indexes. EUR is finishing 2021 near the 1.5-year lows, after starting the year at the high of April 2018 near 1.2300.

The current situation on the market is quite risky due to possible volatility, though the chances of that are slim. The markets are likely to go steady in the final days of 2021, unless unexpected news appear.

Decreasing risk appetite has put an end to the S&P 500 rally - on Tuesday, the index closed in negative territory. More than half of the S&P 500's sectors have made gains, indicating that investors remain optimistic despite Omicron and the risks of an interest rate hike. US futures remain stable on Wednesday - there is nothing that could trigger a sell-off.

The end of the index rally led to increased demand for USD - USDX went on the upside after consolidating near 96.00. The US dollar index is unlikely to extend it further in the upcoming 3 days, but it could test 97.00.

The Fed is sticking to their plan to accelerate QE tapering and raise the interest rate in 2022. The regulator hinted at 3 increases during its meeting in December. The first hike out of 3 could occur in April. Strong US economic data are also pushing up demand for the US dollar. The Redbook retail sales index jumped by 21.4%, while the FHFA house price index added 1.1%, compared to 0.9% in the previous month.

The rising number of confirmed COVID-19 cases is limiting risk appetite, boosting defensive assets. Although the Omicron strain is less severe than earlier strains, its high infectivity is limiting investor optimism.

The number of new infections has exceeded 500,000 in the US, 300,000 in the UK, and 200,000 in Spain, and it is expected to rise further. The new strain could end up having a worse impact than Delta.

Omicron is unlikely to increase optimistic sentiment in the market, similar to the uptrend caused by vaccine development last year. The chances that the pandemic would retreat this winter are slim.

The above-mentioned factors could send EUR/USD downward in early 2022. A rise in risk appetite among investors is not likely, and the Fed monetary tightening would boost USD in the short term.

The US dollar could increase up to 1.1000 or even more against the euro - something that has been considered a real possibility by many high-profile investment banks.