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Last year was difficult and unsuccessful for the euro. The EUR/USD pair was trading at a high of 1.2340 at the beginning of the year, and settled at a low like 1.1186. The Covid crisis and its consequences had a great impact on the foreign exchange market. Lockdowns, new strains, rising energy prices, accelerating inflation, uncertainty of the world central bank regarding incentives and rates forced investors to diversify their portfolios by buying the US dollar.
The pressure on the EUR/USD pair was exerted and will continue to be exerted in the new year by the multidirectional policy of the American and European central banks. The Federal Reserve announced incentives, planned a series of rate hikes, while the European Central Bank refused to take decisive measures in the fight against inflation, considering it temporary. ECB President Christine Lagarde made it clear that there will be no increase in interest rates in 2022, as policy tightening may stop the economic recovery.
At the first trade of this year, the dollar strengthened noticeably, hinting at a further upward trend. The most significant daily increase in two months was demonstrated. Thus, the indicator was able to recoup the losses of the last few sessions of last year. The main support for the greenback was provided by a sharp jump in the yields of treasuries. On 10-year securities, the yield increased by 11 bps, to 1.628%, which is the high since November 24.
Now the target of the US currency index is the level of 97.00.
On Monday, the economic calendar was quite stingy and it was not easy for the euro to resist the dollar. The euro was supposed to advance to the key technical support of 1.1300, but bears were able to push the rate even lower.
In the coming days, investors' attention is expected to be focused on the news about Omicron. In Europe, as in the United States, the number of infected continues to grow rapidly. At the same time, European countries are now the closest to tightening quarantine restrictions. Lockdowns will entail a decrease in economic activity in the region, which in the near future will put additional pressure on the EUR/USD pair.
Note that last week the euro was able to get some support, showing a spectacular rally, but the moment has passed. The EUR/USD pair has lost its growth momentum this year. The euro, as previously predicted, will continue its gradual downward movement to the area of 1.0850-1.0900. The recovery of the single currency within the correction is possible, but it is unlikely that growth in the most optimistic scenario will exceed the value of 1.1860. Such a scenario is not being considered at the moment.
The tone of the trade will be set by the dynamics of the dollar, and the divergence of the monetary policy rates of the Fed and the ECB will be the key driver.
The resistance is located at 1.1400, 1.1435, 1.1485. Support – 1.1320, 1.1270, 1.1235.
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