EUR / USD pulls back towards 1.2250 after rising modestly above 1.2300

• EUR / USD has been on the defensive in recent trading amid a deterioration in the broader market appetite for risk.
• EUR / USD has pulled back towards 1.2250 from earlier above 1.2300.
• Markets are showing nerves ahead of risk events this week; the Georgia Senate elections, the US PMI ISM and NFP numbers and the Fed Minutes.

He EUR/USD It has retreated from previous highs above 1.2300 amid a broad recovery from the lows of the US dollar as risk appetite worsened. It looks like 1.2310 again provided strong resistance and the EUR / USD is now trading closer to 1.2250, but still holding onto pretty decent gains on the day of around 40 pips or 0.3%. EUR / USD bears will look for a move lower towards the December 31, 2020 lows of 1.2210.

The pair’s decline in recent trading appears to be a function of a US dollar rally from lows (the dollar index rebounded from 89.40 to 89.90) amid a broader deterioration in risk appetite (major exchanges of US securities more than 2% less on the day). Market participants appear to be taking some risks off the table before key events later in the week, as well as experiencing some volatility typical of this time of year.

Factors to consider for the EUR / USD this week …

Starting with the USD side of the equation; There are a few notable events that traders should watch out for.

1) Risk Appetite: At the beginning of Monday’s session, numerous commentators and market analysts noted that extreme risk in positioning (i.e., overweight stocks and other risk assets and underweight USD) presented risk to the Key downside for markets this week and into the future in 2021. Following the rally in risk assets (particularly equities) seen since early November 2020 and expanded during last week’s “Santa Rally,” some had even suggested that markets were entering the realm of “irrational exuberance.” His warnings already seem relevant as the major US equity indices fell more than 2% on Monday amid a lack of notable catalysts. If this pullback in sentiment continues later in the week and even into the month, this could support the US dollar.

Remember last September; From early August to early September, the Nasdaq 100 was up nearly 13%. However, as of mid-September, the Nasdaq 100 had corrected almost 15% from its previous highs.

2) US Data – Risks appear to be tilted to the downside for the USD regarding how markets might interpret this week’s major ISM (released Tuesday and Thursday) and official labor market data (released on Friday) for December. Market commentators have argued that the good data could reinforce the risk in market sentiment, which has been negative for the USD, while the bad data could generate expectations of further monetary easing from the Fed, also a negative USD.

3) Runoff election in Georgia: The two Senate seats up for grabs in Georgia will decide who takes control of the Senate (Republicans or Democrats). While the elections take place on Tuesday, the outcome is likely to remain unknown for some time while the mail-in ballots are counted. A similar reaction to the November 3 elections is likely; Republicans are likely to have an early lead given higher in-person voter turnout that will be counted faster, then Democrats will catch up as mail ballots are counted.

Democrats need to win both seats to get a majority in Congress. The biggest market reaction would be an outcome in which the Democrats succeed. In this case, expect significant additional fiscal stimulus from the US in 2021 and higher nominal returns as a result. The USD is likely to be oscillating as the election outcome remains uncertain, which means that the EUR / USD is likely to be as well.

4) FOMC minutes from December 15-16 meeting: The Fed made a slight adjustment to the future direction of its asset purchase program, enough to reinforce expectations that it will continue to buy bonds at the current rate (or more fast) until substantial progress is made. The inflation and unemployment mandates have been met. The minutes should also reinforce market expectations that the Fed’s loose monetary policy will continue for a long time.

Moving quickly to the EUR side of the equation; While the USD and global risk appetite dynamics, which will be heavily influenced by the aforementioned factors, will play a crucial role in determining EUR / USD price action this week, it is also worth keeping in mind. count some European factors.

Preliminary December inflation data for countries such as Germany, France, Spain and Italy will be released ahead of the aggregate numbers for the euro zone, which will be released on Thursday at 10:00 GMT. Amid the worsening outlook for the eurozone economy in late 2020 due to lockdowns and Covid-19, no one expects anything more than even more negative inflation. The headline CPI probably remained in deflation at a year-on-year rate for the sixth consecutive month in December. This should not have too negative an impact on the EUR as there is not much the ECB can or appears willing to do to materially change the short-term inflation outlook at this time.

A speech by the ECB’s chief economist, Philip Lane, at 8:45 PM on Monday will also be worth watching, as will, of course, any other development on the Covid-19 / lockdown front on the continent.