- EUR / USD fell below 1.1250 in recent trades as risk appetite recovers and traders raise their aggressive bets on the Fed.
- The bears will look to pull back towards recent yearly lows below 1.1200.
The EUR/USD has been under pressure in recent trading as the market’s broader appetite for risk has continued to rally. The pair fell below 1.1250 in recent trading and even managed to momentarily eclipse the lows following aggressive testimony from Fed Chairman Jerome Powell last Tuesday at 1.1235. At its current levels, EUR / USD lost roughly 0.4% on the day, making the euro the worst-performing G10 currency overall on the day alongside the Swedish krona. The bears are likely to look for a retest of the recent yearly lows below 1.1200 in the coming sessions.
Driving the day
Improving risk appetite was the main driver of the EUR / USD move lower on Tuesday. Traders and analysts have been citing the reversal of Omicron fears and hopes for Chinese stimulus as drivers of the broad rally in sentiment that saw the S&P 500 open 1.2% and the Stoxx 600 Index rise 2.0%. Market participants appear to be coming to the idea that the Omicron variant causes milder symptoms than the previous Covid-19 variant, posing less of a threat to the economic outlook.
Therefore, the Fed’s tightening expectations for monetary policy in 2022 have generally returned to pre-Omicron levels. The implied yield for the 3-month December 2022 Eurodollar future rose again to 1.05% on Tuesday, from below 1.0% at the beginning of the week and just 0.8% at the end of December. In the absence of major US data releases or a Fed speech, this recent price revision has clearly been a function of the improvement in the broader market risk appetite.
Central bank policy divergence remains the main issue driving EUR / USD over the medium term. Another spike in US consumer price inflation (CPI) figures at the end of the week should solidify market expectations for the Fed to agree to accelerate the pace of its QE cut from January, which it could weigh even more on the EUR / USD.
Technical levels
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