January 4, 2022 15:49:18

It’s been a busy and buoyant start to the new year with risk sentiment most definitely positive amid rising rates. Omicron is now seen as manageable and a background setting rather than a primary driver of markets. Although record infections will have an impact on supply chains and services, central banks are expected to keep inflation in check with the Fed reining in liquidity and raising rates.

Being long USD is undoubtedly a consensus trade for the year. Fed policy is set to be supportive of the dollar, especially against low yielding currencies whose central banks are lagging the rest of the more hawkish policymakers.

Three interest rate hikes are priced for the year, with the first rise fully priced in by April. This appears to set the bar pretty high for data in the near-term. Of course, the first Friday of the month brings with the US non-farm payrolls, with a solid headline figure of around 400k forecast by analysts.

EUR/USD backs off Fib level and 50-day SMA

The euro lost nearly 7% against the dollar last year which made it the second worst performing major after the yen. As well as central bank policy divergence, we may see some political risk premium creep into the single currency over the next few weeks, due to the Italian President elections.

A pullback in EUR/USD looks to have been repelled at the end of last year at a Fib level (38.2%) of the October/November move at 1.1380. This euro rally also failed at the 50-day SMA around 1.1368 so this area is reinforced as solid resistance. Only a strong close above here negates the long-term bear trend.

The major is currently trading just above the Fib level (61.8%) of the 2020 low/2021 high move at 1.1298. The pair tracked sideways for the whole of December between 1.1221 and 1.1386 and the longer price consolidation goes on, the stronger the breakout will be. This is normally in line with the dominant long-term trend. The bottom of the recent range is 1.1221 with the cycle low at 1.1186.