EUR/USD price analysis: will the pair retest the 1.12 level?
17:39, 30 November 2021
The EUR/USD currency pair experienced significant volatility in Tuesday’s trading session.
In recent days, the euro has risen against the US dollar on worries the US Federal Reserve will halt interest rate increases next year due to the spread of the Omicron Covid-19 variant.
Fed Chair Jerome Powell told a US senate committee that the emergence of the Omicron variant poses “downside risks to employment and economic activity and increased uncertainty for inflation.”
EUR/USD gained 200pips in less than a week, rising to 1.1380 from 1.118, before settling at 1.1300 by 17:30 GMT.
Earlier in the morning, a 30-year high in euro area inflation buoyed euro bulls, but the pair came under pressure following the statement by Oxford University that there is no proof that immunisations do not protect against the Omicron form.
From a fundamental perspective, EUR/USD remains inextricably linked to the divergence of monetary policy between the US Federal Reserve and European Central Bank.
The former is ahead of the latter in the monetary policy normalisation cycle, therefore, any news that reduces market expectations of future US interest rate hikes benefits the currency pair. On the contrary, additional indications that an interest rate hike is imminent strengthen the dollar's attractiveness, hence pushing EUR/USD down.
On the technical front, the pair recently recovered from its year-to-date lows of 1.1185 to 1.1290. If the EUR firmly breaks the support level at 1.1233, it may attempt to extend downwards to retest its lows against the dollar, while a break of the resistance level at 1.1380 could potentially push bulls towards 1.1460–1.1480 area.
EUR/USD: fundamental analysis
EUR/USD and 2-year Schatz-Note spread – Credit: KoyfinMonetary policy divergences between the Fed and the ECB have been the main driver impacting EUR/USD in recent months.
In early November, the Fed announced a tapering of its asset purchases at a pace of $15bn per month starting this month. The ECB is still far behind in making this type of policy announcement, as President Christine Lagarde reiterated the importance of maintaining ultra-accommodative financial conditions in the euro area, even if inflation is projected to remain above the target in 2022.
Better-than-expected economic data and persistent inflation in the US have prompted investors to move ahead in pricing in interest rate hikes in 2022, thus supporting the rate attractiveness of the dollar against other low-yielding currencies such as the euro.
As such, since the second half of 2021, EUR/USD has been closely tracking the yield difference between Germany's two-year Schatz and the US two-year Treasury Note – a proxy for ECB-Fed interest rate differentials.
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EUR/USD: technical analysis
EUR/USD daily chart – Credit: Capital.comEUR/USD was last at 1.1300 by 17:30 GMT, in a session characterised by heightened volatility.
The pair had first reached 1.1380 in London midday trading, buoyed by a stronger than expected inflation data in the Euro area, and then fell precipitously to 1.1240 at New York’s opening following Oxford’s announcement.
On the daily chart, the 14-day RSI index just recovered to 38, after hovering at the oversold level for the most of the previous week.
The 50-day simple moving average (SMA) is currently at 1.1522, or 2% over the current price, while the 200-day SMA lies at 1.1827, or 4.8% above the current price.
A firm break of the nearest support level at 1.1233, could potentially extend EUR/USD downwards to retest its year-to-date lows at 1.1180, while a break of the next resistance level at 1.1380 may potentially drive bulls into the 1.1460-1.1480 range.
Read more: Eurozone inflation hits 4.9%, boosting single currency
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