EUR/USD: The greenback is set for more gains unless the Fed acts

EUR/USD has been falling alongside as US yields rally. It seems that only another taper tantrum can halt the dollar’s ascent – but for now, the Federal Reserve is tolerating higher returns on Treasuries, allowing the dollar to rise, FXStreet’s Analyst Yohay Elam reports.

Key quotes

“The Fed is seeing through the current hardship and is looking forward toward the vaccine-led recovery. Higher yields reflect optimism, which it welcomes – at least for now. What will it for the powerful central bank to boost bond buys and send the dollar down? A stock market sell-off. The Fed seems unwilling to see “financial conditions” – aka equities – suffer. If investors throw a 2013-style tantrum – when shares fell on the mere hint that the Fed would slow Treasury purchases – Powell may change his mind.” 

“In the meantime, COVID-19 continues raging on both sides of the Atlantic, while the vaccination pace remains sluggish. So far, only around 2% of Americans received at least the first jab, while in most European countries the ratio is below 1%. Investors would need to see immunization stats rising and covid ones falling.” 

“Euro/dollar has dropped below the 50 and 100 Simple Moving Averages on the 4-hour chart and momentum turned sharply to the downside. The Relative Strength Index remains above 30 – outside oversold conditions and allowing for more falls.” 

“Some support awaits at the daily low of 1.2165 – which is the lowest in three weeks. It is followed by 1.2125 – a critical support line that supported EUR/USD more than once in December.” 

“Robust resistance awaits at 1.2205, which was a swing low in late 2020. It is followed by 1.2240, which is where the 100 SMA hits the price.”