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  • Markets are fixated on US stimulus and the US dollar with an eye on COVID developments.
  • EUR/USD bulls banking on a softer greenback for foreseeable future.

EUR/USD is currently trading at 1.1819 between a range of 1.1779 and 1.1843, unable to capitalise fully on the vaccine news as the greenback battles back for territory.

The US dollar is a keen focus this week, catching some of the market participants off-guard when it initially fell on the news of a covid vaccine only to then rally across the board. 

Volatility in forex was immense on Monday on the welcomes headlines that Pfizer/BioNtech’s partnership has produced a vaccine that works 90% of the time in trials. 

The reflation trade has supported the greenback as markets expect less stimulus over a shorter time frame for the US.

”That said, since it will still be some time before a vaccine reaches large proportions of the global population, the news can not detract from the fact than many people, particularly in the US and Europe, are facing a difficult winter,” analysts at Rabobank argued. 

”This means that central banks are likely to continue offering plentiful policy support for the time being.”

”The combination of cheap money and vaccine hopes is likely to allow for decent levels of risk appetite and, while there are still risks on the horizon, we have curtailed our expectations for another round of USD strength and revised up our 3-month EUR/USD forecast to 1.17 from 1.16 and our 6 mth forecast to 1.18 from 1.14.”

Eyes on US politics

Meanwhile, the US dollar hangs in the balance of the US government. 

The US elections probably result in a split government which should be dollar supportive as it would likely split the covid stimulus package by about half the $2 trillion previously proposed.

Moreover, there are prospects for governmental gridlock over potential tax hikes, as well as spending increases.

Corporate America has cheered the prospects of this, as well as hopes for less regulatory changes. Together, these positives pare the disappointment in prospects of less stimulus.

DXY technical analysis

As per the analysis at the start of the week, where a correction was expected following such a long spell on the back foot, the index has played out according to the forecast as follows:

The 38.2% is offering resistance which is typical of such price action where a correction follows an impulse. 

If the dollar sells off from here, the euro bulls will be back in play.