EUR/USD struggles to defend 1.0600 as market fears renew US Dollar demand

• EUR/USD holds lower grounds after closely avoiding the 1.0600 breakdown.
• Distrust on China unlock, global restrictions on travelers from Beijing reverse Covid-linked optimism.
• Escalation in the Russia-Ukraine tension adds strength to the risk-off mood.
• US 10-year Treasury bond yields rose the most since October 19 and underpinned US Dollar despite downbeat US data.

EUR/USD fades bounce off 1.0606 as bears keep the reins after retaking control the previous day, following a two-day winning streak. The major currency pair’s latest losses could be attributed to the strong US Treasury bond yields that triggered the US Dollar’s comeback.

US 10-year Treasury yields rose to the highest levels since November 14 while flashing 3.88% by the end of Wednesday’s North American session. In doing so, the key US bond coupon marked the biggest one-day rise since October 19 on Wednesday.

The run-up in the US Treasury bond yields could be linked to the market’s lack of confidence in China’s unlock, as well as the geopolitical woes surrounding Russia.

Recently, the US Health Official mentioned, “Beginning January 5, all passengers from China aged 2 and up will be required to undergo a Covid test two days before departure.” Previously, India, Japan, Taiwan and Italy announced requirements for COVID tests for visitors from China. Also teasing the EUR/USD sellers was news from Reuters suggesting inconsistent virus details from Beijing. “China reported three new COVID-related deaths for Tuesday, up from one for Monday - numbers that are inconsistent with what funeral parlors are reporting, as well as with the experience of much less populous countries after they re-opened,” reported Reuters.

On the other hand, the latest updates from Ukrainian Military and Russian offices also portray the escalation of the geopolitical tension propel the US Dollar’s haven demand. “Russian forces increased mortar and artillery attacks on the city of Kherson more than six weeks after it was retaken by Ukrainian troops, while also exerting pressure along frontlines in the east,” said the Ukrainian Military office per Reuters. In this regard, Russia previously stated that the only agreements that account for the four additional territories joining Russia are feasible.

Amid these plays, Wall Street closed in the red while commodities also reversed previous gains.

That said, the US Dollar Index (DXY) rose for the second consecutive day to 104.50 at the latest. While tracing the firmer US bond coupons and cheering the risk-aversion the USD ignored downbeat US Pending Home Sales for November, -37.8% YoY versus -36.7% expected and -37.0% previous readings. It should be noted that the US Richmond Fed Manufacturing Index for December improved to 1.0 versus -4.0 anticipated and -9.0 prior.

Looking forward, US Initial Jobless Claims will decorate the economic calendar but major attention should be given to the qualitative details for fresh impulse.

Technical analysis

The increasing strength of the bearish MACD signals join the EUR/USD pair’s repeated attempts to break the 1.0600 round figure to keep the bears hopeful. It’s worth noting that the 21-DMA support near 1.0580 adds to the immediate downside filters.