Risk assets in Europe remained under pressure on Monday. At the same time, sovereign debt yield struggled to rebound after the fall on Friday, which indicates that risk-off continues to dominate sentiment, and pandemic risk-premium is gradually building up. The risk that the European Central Bank (ECB) will delay hiking rates and curbing PEPP stimulus in response to the new COVID-19 wave and associated slowdown takes away upside potential from the Euro and paves the way for new lows in EUR/USD.
As for the US, investors' attention remains on events related to the Fed. President Biden's appointment of a new head of the Fed (Powell's term expires in February 2022) and the release of the November minutes of the Fed meeting, which may provide more information on how the Fed will taper asset purchases. In addition, market participants lack details on how the Fed will react to the still accelerating growth in consumer prices in the United States. The minutes of the Fed meeting can reduce the uncertainty in this matter.
The dollar index briskly recovered after a pullback from 96.20 to 95.50 and was back above 96 points on Monday. Undoubtedly, risk-off in European markets contributes to the rise of the dollar. If the situation with COVID-19 in Europe continues to deteriorate and the current inflation trend in the US continues, the dollar index may target the highs of June 2020.
Despite heavy selling pressure on the Euro and plenty of oversold signs, the news that Austria announced a complete lockdown on Friday and Germany said it would not rule out similar measures sets the stage for more downside in the currency.
The news also led to a downward breakout of the 1.05 level of EUR/CHF, which is a crucial barometer for European asset risk. Bad news from the pandemic front reinforces a bearish market view on EUR/USD, in which the core underlying idea is a widening gap in policy normalization between the Fed and the ECB.
There was a lag in the normalization process even without lockdowns as inflation in the Eurozone was expected to slow down in 2022 faster than in the United States. The introduction of lockdowns will increase pressure on the EU's service sector and boost the ECB's chances to extend the PEPP program beyond March 2022.
EUR/USD tested a new low on Friday at 1.125 and nevertheless remains vulnerable to further decline. Break of the level of 1.125 will open the way to the low of June 2020 - the level of 1.1170. At the same time, if bullish pullback proves to be sustainable, short positions could start to build up near the level of 1.13.
Despite increasing pandemic risks in Europe, virus data show that the UK is doing better than its European counterparts in the new wave, thanks mainly to high rates and levels of vaccinations and accumulated herd immunity. The imbalance of risks, in turn, may lead to a decrease in EUR/GBP, from the point of view of technical analysis, the 0.83250-0.83 mark looks attractive, from where we can expect a bullish rebound.