EURUSD Under Pressure Amid Widespread Risk Aversion

25 Jan 2022

EURUSD is consolidating in a narrow range after a steep decline that occurred from 14^th to 18^th January 2022. Amid the general market risk aversion, the US dollar appreciated against a basket of rival currencies, as evidenced by a V-shaped recovery of the US dollar index (DXY) to its current level around 95.95. The safe haven currency benefited as investors offloaded their riskier assets amid geopolitical tension, concerns of a hawkish Fed and lingering omicron woes.

Risk Aversion amid Russia-Ukraine tension

Markets are cautious as tensions around the Russo-Ukrainian War rise with Russia threatening to invade the NATO and European Union backed Ukraine. The head of NATO has warned of a risk of fresh conflict in Europe, and estimated a 100,000 Russian troops have amassed on the Ukrainian border in response to what it says are threats to its security from the NATO and Western powers. Roughly 8500 American troops have been put on heightened alert in the US in case NATO activates its Response Force or if the security situation in Europe worsens.

Should a war breakout, volatility would be felt across the global financial market with energy prices in the spotlight as Russia is the supplier of natural gas to Western Europe. Furthermore, such a conflict would send the demand for the safe haven US dollar soaring, weighing further on the EURUSD pair.

Fear on Fed’s tightening

Another factor of significant impact on the stock and foreign exchange market is also the concerns around a hawkish Fed ahead of their policy meeting on Wednesday. In response to the highest inflation in decades contributed by the loose monetary policy, reopening of economies, labour shortage and global supply chain bottleneck, the Fed had signalled that it will start tightening its monetary policy sooner to calm the inflationary pressures.

General market consensus point to four rate hikes in March, June, September and December 2022, but the fear of a sooner than expected rate hike in this upcoming meeting has provided further strength to the US dollar.

Technical Analysis

The EURUSD is under significant pressure with the prices falling back into the ascending triangle formation after a breakout on 12 January that did not sustain. Moreover, it has also been kept under the 20-day simple moving average (20 DMA) resistance line for the past six trading days. Technical indicators like Relative Strength Index (RSI) indicates that bearish momentum has dominated the pair with the reading sliding under the neutrality zone of 50 and failing to climb back above it after two attempts. The Moving Average Convergence Divergence (MACD) shows a waning bullish momentum as the histogram approaches the zero line. A negative MACD histogram would further validate the downtrend.

Looking ahead, we hold the view that bearish sentiment will continue to weigh on the pair. If the price breaches below the ascending triangle support, technical target will be set at S3 (1.1186). In the meantime, the 20 DMA and the ascending triangle resistance line (R1) will serve as resistance for the pair.

Tuesday, January 25

USD – Housing Price Index (MoM)(Nov), S&P/Case-Shiller Home Price Indices (YoY)(Nov), Consumer Confidence (Jan)

EUR – Germany IFO – Business Climate, Current Assessment, Expectations (Jan)

Wednesday, January 26

USD – New Home Sales (MoM)(Dec)

EUR – Germany 10-y Bond Auction

Thursday, January 27

USD – Fed Interest Rate Decision, Fed’s Monetary Policy Statement, FOMC Press Conference, Core Personal Consumption Expenditures (QoQ)(Q4), Durable Goods Orders (Dec), Durable Goods Orders ex Defense (Dec), Durable Goods Orders ex Transportation (Dec), Gross Domestic Product Annualized (Q4), Nondefense Capital Goods Orders ex Aircraft (Dec), Personal Consumption Expenditures Prices (QoQ)(Q4), Pending Home Sales (MoM)(Dec)

EUR – Germany Gfk Consumer Confidence Survey (Feb)

Friday, January 28

USD – Core Personal Consumption Expenditures – Price index (MoM)(YoY)(Dec), Personal Income (MoM)(Dec), Personal Spending (Dec), Michigan Consumer Sentiment Index (Jan)

EUR – France Gross Domestic Product (QoQ)(Q4), Germany Gross Domestic Product (QoQ)(YoY)(Q4), EU Business Climate (Jan), EU Consumer Confidence (Jan)

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