EUR/USD rebounds to test 1.1300 amid strong euro performance

• EUR/USD rebounded strongly to near 1.1300 on Tuesday, with the euro outperforming in the G10 space.
• Technical buying after the pair bounced from the bottom of its recent ranges in the 1.1220-1.1230 area likely played a role.

Its not quite clear why the euro has been the best performing G10 currency on the session so far this Monday but regardless, robust demand for the single currency has been enough to lift EUR/USD about 50 pips from earlier session lows in the 1.1230s to current levels near 1.1280. The pair, which momentarily went above 1.1300 earlier in the session, has been consolidating in the upper 1.1200s amid quiet markets characterised by slow newsflow and with the 21-day moving average (at 1.12846) acting as a magnet.

In terms of fundamentals, amid a lack of any major economic data releases or Fed speak, the main driver in markets on Monday has been 1) concerns about the spread of Omicron and 2) worries that the Biden administration will fail to pass its economic agenda. Perhaps this latter concern, which presents a downside risk to US economic growth in 2022 and subsequent years, is one factor lifting the pair. Some may also point to very vocal hawks on the ECB governing council as lifting EUR/USD.

Pierre Wunsch of the Belgium central bank said the ECB is not sufficiently recognising upside inflation risks and Robert Holzmann of the Austrian central bank said over the weekend that the ECB is ready to adjust its policy if inflation doesn’t fall. But the hawks remain in the minority at the ECB. ECB President Christine Lagarde and Chief Economist Philip Lane are the better bellwethers for where sentiment/consensus thinking at the bank resides.

Technical buying is an alternative reason why EUR/USD may have bounced. The 1.1220-1.1230 area has been a key zone of support for the pair in recent weeks, just as the upper 1.1300s (the 1.1350-1.1380 area) has been a key area of resistance. Monday’s price action could purely be a reflection of the fact that traders were not prepared to force a break to the south of recent ranges, especially at the start of a week expected to be characterised by thin pre-holiday liquidity conditions.