After failed attempts to challenge the descending 20-DMA, the euro came under more severe selling pressure on Tuesday despite significant improvement in risk sentiment across the financial markets.
Global stocks advance steadily, with all signs pointing to a turnaround in risk trades after a volatile and mostly bearish week when investors were spooked by an omicron coronavirus variant.
As such, EUR/USD slipped to 1.5-week lows around 1.1230, and the bias remains to safe rallies in the euro. Indeed, failure to cling to the 1.1300 handle made the common currency more vulnerable, with the risk of further declines quite realistic now.
Adding to a downbeat tone surrounding the euro, European Central Bank governing council member Peter Kazimir said that the monetary authorities should be wary of premature tightening. In contrast, the Federal Reserve is widely expected to announce the faster tapering of its bond-buying program at the upcoming meeting due later this month. This, in turn, will clear the way for interest rate hikes next year.
Against this backdrop, the pair could see deeper losses in the coming days or weeks before a reversal takes place. To see a strong recovery, the common currency would need to see a hawkish shift in the ECB rhetoric, but such a scenario looks unlikely so far. Also, let's not forget that global markets are still awaiting more news on Omicron, with risks persisting on this front despite the current optimism among investors.
So, if EUR/USD fails to hold above the 1.1200 figure in the short term, a plunge to fresh mid-2020 lows could be expected. In this context, the 1.1170 may come into the market focus, followed by the 1.1145 zone where the lowest levels since May 2020 arrive. On the upside, only a decisive break above the mentioned 20-DMA would mean some retreat in USD bulls.