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The greenback managed to bounce off the recent lows, retaining a modest bullish bias since last Thursday when the USD index fell to two-month lows around 94.60.
On Monday, the dollar edged higher to the 95.35 area and was last seen trading up 0.13% on the day. Despite the resurgent bullish bias, the US currency remains sluggish in thin holiday trading, with US markets closed today for Martin Luther King Jr. Day.
Risk sentiment has improved in Europe after a mixed session in Asia, thus capping demand for the safe-haven dollar. However, as fresh coronavirus restrictions are looming in several regions, risk aversion could reemerge in the days to come and push the dollar higher versus the high-yielding counterparts.
Of note, the UK reportedly could review COVID measures this week or early next week, while virus restrictions are set to come in Japan. In China, Beijing has tightened rules for entering the city after a rise in Omicron cases.
Should stock markets switch into a corrective mode in the coming days or weeks, the greenback could stage a more decisive bounce, also on the back of the Fed’s hawkishness as the odds of a March rate hike exceeded 75% last week and keeps rising. In contrast, the European money markets now price in 20 bps of the ECB rate hike by December 2022.
Against this backdrop, the longer-term outlook for the EUR/USD pair stays bearish. The euro came off two-month highs registered around 1.1480 last week and has been on the defensive since then, holding around the 1.1400 figure.
Should this support zone give up, the 20-DMA, currently at 1.1340, will come back into the market focus. On the upside, the key barrier arrives at 1.1500.
It should be noted that this hurdle is strengthened by the descending 100-DMA, so the common currency may need a solid bullish driver to overcome this psychological resistance in the near term.
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