18.01.202118:12 Forex Analysis & Reviews: EUR/USD: dollar risks further decline if global recovery accelerates

This month, the USD exchange rate reached an almost three-year low, but since then the greenback has strengthened by more than 1%, which has given rise to talk about a reversal of the long-term downward trend of the US currency.

"The market is now in a state of anticipation, reflecting on whether higher yields on US government bonds can support the dollar or whether it will continue to decline," said strategists at Bank of Singapore.

"We think that the balance of risks is still shifted in favor of a reflationary environment and therefore risk sentiment should remain positive and we should see further weakening of the US currency," they added.

The Goldman Sachs specialists still adhere to the bearish outlook for the USD, expecting it to weaken in 2021 across the entire spectrum of the market.

"We continue to believe that the combination of an overvalued dollar, low nominal and real rates in the US, and a rapid global economic recovery will put pressure on the US currency throughout this year," they said.

According to the bank's forecast, the EUR/USD pair will be trading at 1.2500 in March, near 1.2700 in June, and around 1.2800 in December.

Towards the end of last week, the main currency pair renewed this year's lows below 1.2100.

The main factor of pressure on it was risk aversion, which played into the hands of a safe greenback.

The disappointing US statistics released on Friday increased the concerns of market participants about the country's economic prospects.

In December, retail sales in the United States fell 0.7% on a monthly basis. At the same time, the data for November was revised downward, showing a decline of 1.4% instead of 1.1%, as previously reported.

The deteriorating situation with the pandemic and the extension of quarantine restrictions in some countries, as well as the persistence of the risks of their tightening, raise concerns among investors about the global economic recovery.

However, the United States and the global economy have a resource for optimism that could improve market sentiment and negatively impact the defensive dollar.

Joe Biden will take over the White House on Wednesday. He is going to promote a $1.9 trillion stimulus plan and also wants to vaccinate 100 million Americans during his first 100 days in office. According to Anthony Fauci, a leading U.S. epidemiologist, this is an achievable goal.

Another source of optimism for dollar bears is the Fed. The head of the US Central Bank Jerome Powell last week confirmed the regulator's commitment to super-soft monetary policy. The Fed does not expect interest rates to rise before 2023.

As US exchanges are closed on Monday for Martin Luther King Day, and Joe Biden is due to take office on Wednesday, the major pair is trading in a narrow range (1.2055-1.2085).

On Friday, the EUR/USD pair made a net breakdown of the key support at 1.2130. This could be a sign that the pair has already formed a short-term top. A breakdown of the 1.2055-1.2060 area will confirm the bearish sentiment of the pair and aim it at the psychologically important mark of 1.2000, a breakout of which will lay the foundation for further decline.

Attempts to recover EUR/USD may face resistance near 1.2100. The subsequent growth and breakdown of the former support around 1.2130 may trigger a short squeeze and send the pair to 1.2170-1.2175. Further strong resistance is at 1.2200 and 1.2210.