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The focus of investors' attention on Thursday is on the speeches of US President-elect Joe Biden and Fed Chairman Jerome Powell.
Biden is expected to present his proposals on measures to support the national economy. Last week, he promised to spend several trillion dollars for this purpose.
Meanwhile, Fed chair Powell noted the need for fiscal stimulus last month, which means that he may express support for Biden.
A further increase in the money supply in the United States would seem to be a negative signal for the USD. However, the prospect of more generous fiscal stimulus boosted Treasury yields, which supported the greenback.
After a prolonged period of weakness in the US currency, investors began to bet on the recovery of the US economy, expecting that this will lead to an increase in inflation in the country and a curtailment of emergency measures by the Fed by the end of the year.
"It is assumed that the acceleration of economic growth in the United States will contribute to an increase in employment and the return of inflationary forces, which will reduce the pressure on the Federal Reserve in terms of the need to maintain low rates," said experts at Julius Baer.
"Even if the first Fed rate hike is still far away, further payments from the US administration are likely to contribute to the recovery of the national economy and support recent rumors that the US Central Bank may reduce asset purchases by the end of this year," said strategists at Commerzbank.
The main question now is whether the Fed is going to buy additional US debt securities or whether it will consider the increase in the yield of treasuries as a sign of the recovery of the national economy and think about the need for an earlier than expected tightening of monetary policy.
Several representatives of the Federal Reserve have already denied the option of early curtailment of easing measures. However, the Fed Chairman has the final say.
In the current environment, the American Central Bank does not need to change the asset purchase program. Therefore, the focus will be on Powell's comments on the foreseeable future. If the speech of the head of the Federal Reserve radiates optimism, the dollar may rise. The cautious tone of Powell's statements is likely to put pressure on the US dollar.
The greenback was forced to partially abandon its recent gains amid a retreat in the yield of 10-year treasuries from the highest values in ten months. Nevertheless, the latter is holding around 1.11%, which is still significantly higher than the levels recorded a week ago. The retreat may be short-term, as inflation expectations remain inflated, as the new US president is going to announce an additional program to stimulate the national economy on Thursday.
The larger the stimulus package, the stronger the support for the USD rally. If Joe Biden chooses a more modest package of measures, the disappointment of investors may take the form of a sell-off of the USD.
Thus, we can see the start of a deeper correction of the dollar or a return to growth with potential targets near 91 and 92 points.
On Thursday, the main currency pair shows restrained dynamics, trading in a narrow range in anticipation of news from the United States.
The important support for EUR/USD is located near the 1.2120 mark, a break of which will open the way to the December lows around 1.2060.
Resistance is located at 1.2180, 1.2220, 1.2240, and 1.2270.
Obviously, the single currency should trade well below current levels. And the reason lies not only in the tightening of quarantine in Germany, which can drag on for eight to ten weeks. Earlier, ECB President Christine Lagarde said that the regulator is closely monitoring the fluctuations in the exchange rate of the single currency. Given that the largest economy in the eurozone will follow a tight social distancing policy throughout January and February, it will be difficult for the EUR/USD pair to maintain its highest levels in two and a half years.
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