EUR/USD bulls targeting 1.2000 denied on US dollar’s resurgence

• EUR/USD bulls will need to sit tight waiting for the next bearish wave in the DXY.
• Vaccine hopes have the market re-thinking the USD narrative. 

 The euro has been unable to capitalise on the news of the COVID vaccine and volatility on Monday.
 
EUR/USD is down some 0.44% at the time of writing, but off its worst levels of the day down at 1.1795, trading currently at 1.1820 and down from the highs of the session of 1.1920. 

It has been a turbulent start to the week with risk appetite getting a shot in the arm.

First of all, Asia traded bid in the US election aftermath and then the news of a coronavirus vaccine proving 90% successful was seen as a game-changer for financial and commodities markets. 

Initially, the USD was weaker against nearly the whole spectrum of G10 and major EM currencies with higher-beta FX outperforming.

There was obviously a lot of money on the sidelines during the US election risk, but investors have returned in droves on Wall Street amid very positive developments on a potential COVID vaccine. 

Accompanying the rip higher in risky asset prices, US stocks took off with the S7P 500 Index printing an all-time high of 3,645.99. 

However, what is starting to transpire is a market leaning against some of the USD’s recent weakness.

The dollar has rallied in the aftermath of the volatility and as the dust has settled, the DXY is now trading some 0.62% higher, rallying from the session lows of 92.13 to a high of 92.96. 

The move has capped the euro and brings into question whether there needs to be so much stimulus from the US government, after all, a sentiment that had been weighing heavily on the greenback? 

In a note from Reuters, it explained, ”higher Treasury yields and equity prices based on a faster economic recovery due to a vaccine, rather than trillions of dollars of new deficit spending to mitigate economic hardships, is a much better story for the dollar.

If vaccines pass muster and go into distribution before year-end, that could alleviate dollar-negative concerns resulting from last week’s US elections — particularly, that a divided government would impede fiscal stimulus and, thus, force the Fed to ease further.’’

Meanwhile, in a price analysis of the DXY at the start of the week, it was noted that there was room for an upside correction, prior to further downside, as follows:

DXY Price Analysis: Bears in charge eyeing a break of 91 level

The level 38.2% has been met by the market volatility today.

Welcome news, but challenges remain

A healthy correction could equate to a downside extension once the knee-jerk optimism surrounding the US economic recovery dissipates. 

None of this, unfortunately, changes the near-term fact that the global economy faces a challenging path to recovery.

US stimulus and the Federal Reserve will become central to the path of the US dollar for the foreseeable future.

Vaccine or not, a large fiscal stimulus package is needed and years of central bank support remains very much on the table. 

EUR/USD levels