EUR/USD flirts with 1.1300 as yields drop amid sluggish markets, Omicron eyed

• EUR/USD edges lower around weekly bottom, prints two-day downtrend.
• US Treasury yields drop, German Bund yields stay firmer amid covid, Fed chatters.
• France reports the world’s biggest daily jump in covid infections, US reports 55% jump in seven-day average cases.
• US Pending Home Sales and Goods Trade Balance for November will join risk catalysts to direct intraday moves.

EUR/USD remains on the back foot around 1.1300 during the early Wednesday morning in Europe.

The currency major drops for the second consecutive day but struggles for clues amid thin end-of-year liquidity conditions. Adding to the trading filters is a light calendar and a contrasting play between the US Treasury yields and the German Bund coupon.

The US 10-year Treasury yields remain pressured around 1.475% while the two-year benchmark, which jumped to the highest since March 2020, also flirts with a 0.742% level, down 0.8 basis points (bps). On the contrary, seesaw around -0.232% level, near to the five-week high flashed the previous day.

The contrasting moves of the US and EU bond traders could be linked to the ECB v/s Fed battle. Given the recent jump in the US inflation expectations, the Fed is expected to announce the much-awaited rate hike earlier in 2022 versus the ECB’s likely delay in the monetary policy tightening. That said, the US inflation expectations data, as per 10-Year Breakeven Inflation Rate numbers from the Federal Reserve Bank of St. Louis (FRED), stayed near the three-week high of 2.50% at the latest.

France reported the world’s biggest-ever daily jump in COVID-19 infections with 179,807 new confirmed cases while covid figures from New Zealand and China have been easing of late. The UK also marked a fresh all-time high of the daily virus cases with above 122,000 figures while Reuters said, “The average number of new COVID-19 cases in the United States has risen 55% to over 205,000 per day over the last seven days.” Additionally, Australia’s most populous state New South Wales (NSW) reports doubling of the covid infections for Tuesday, with 11,201 new infections and three virus-led deaths.

It’s worth noting that the mixed US data and the year-end holiday mood also challenge the EUR/USD traders. On Tuesday, the US Housing Price Index eased below 1.2% forecast to 1.1% in October while S&P/Case-Shiller Home Price Indices stepped back from 19.5% prior to 18.4%, versus 18.5% market consensus. However, the Richmond Fed Manufacturing Index for December crossed the upwardly revised 12.00 figure with 16.00%.

Looking forward, the current risk-off mood, as portrayed by downbeat yields and stock futures, is likely to keep exerting downside pressure on the EUR/USD prices. However, a lack of liquidity and hopes of fewer hospitalizations due to Omicron, the South African COVID-19 variant, may restrict the short-term downside of the pair.

Technical analysis

EUR/USD keeps the previous day’s downside break of a one-week-old support line amid sluggish Momentum. That said, 200-SMA and 100-SMA restrict the pair’s short-term downside around 1.1300 and 1.1295 respectively. During the quote’s weakness past 1.1295, the 61.8% Fibonacci retracement of late November’s upside, around 1.1260, can offer an intermediate halt before directing EUR/USD sellers towards the monthly horizontal support zone near 1.1230.

On the contrary, an upside break of the previous support line near 1.1330 needs validation from the monthly descending trend line close to 1.1345 before recalling the bulls.