For the fourth day in a row, the price of the EUR/USD pair is in a downward correction range, having moved to the 1.2132 support level before settling around the 1.2160 level. Profit-taking came after strong upward momentum pushed the currency pair towards the resistance level of 1.2350, its highest since April of 2018. The strength of the US dollar has returned as a safe haven in light of the anxiety in financial markets over the rapid spread of the coronavirus and the subsequent global closures.
Yesterday's Sentix survey data showed that investor confidence in the Eurozone rose to a positive level in January for the first time since early 2020, as investors became more confident about a vaccination strategy, in spite of the current lockdowns. According to the results, the Investor Confidence Index rose to 1.3 in January from -2.7 in December. It was the first positive result since February 2020 and was above economists' expectations of 0.7. At -26.5, the Current Situation Index advanced to an 11-month high from -30.3 in December. Likewise, the Expectations Index rose to a record high of 33.5 from 29.3 in the previous month.
For its part, the agency said that there is a possibility of a temporary awakening here, because investors seem to be reducing the risk of economies suffering more damage than the data reflects, and that this will only become visible when restrictions are actually lifted. The think tank also added that the European Central Bank should remain very expansionary from an investing perspective, which supports economic sentiment.
In Germany, investor confidence rose to its highest level in more than two years in January. The Corresponding Index rose to 9.2 in January from 6.9 in December.
Weak investor sentiment helps the dollar's position as a safe haven, which is witnessing growth in demand as investors exit stocks and other high-risk assets. The reasons why investors are more cautious this week include the outbreak of COVID-19 in the Chinese province of Hebei, which was locked down last week. Japan was also closed for a holiday, just days after Tokyo entered its second state of emergency amid the spread of COVID-19 cases.
The euro is trading near its four-year high, and the momentum measures on the charts have been declining at the same time, indicating the possibility of a change in the short-term trend. Now, the 1.2210 level is said to be key. Accordingly, Karen Jones, Head of Technical Analysis for Currencies, Commodities and Bonds at Commerzbank said: “The EUR/USD pair saw divergence in the daily RSI - this reflects the loss of upward momentum and in the near term a downward correction. It has eroded the upside in the near term, but in order to relieve upside pressure, the market will need to see failure at the 1.2210 level. This would lead to losses to the 1.2130 level, the December 21st low, and possibly the 1.2058 level, the December 9th low."
Overall, Jones and the Commerzbank team still have a bullish outlook for one to three months in which they expect the euro to rise as much as its 200-week moving average at 1.2624, although they also said on Friday that the daily close below 1.2210 might increase. This indicates that more short-term dips are likely to happen in advance.
Technical analysis of the pair:
According to the performance on the daily chart, a test of the EUR/USD pair below the support level of 1.2060 will increase the strength of the bears' control, and thus a new descending shift will occur in the general direction of the pair. No breakout is expected below the 1.2000 support. On the upside, the stronger bulls will continue to dominate in case the pair returns to stability above the 1.2300 resistance.
Today, the EUR/USD pair does not expect any important data from either the Eurozone or the United States of America.