Daily Market Recap – EURUSD Rising bond yields strengthen the US dollar

The greenback appreciated against the euro, benefiting from the market's appetite for U.S. government bonds, whose yields are at their highest since the start of the pandemic. As investors anticipate a tightening of monetary policy in the United States, the yield on U.S. debt is rising.

The 2-year U.S. Treasury yield climbed to over 1% for the first time since February 2020, after traders increased their bets on an acceleration of the pace of rate hikes in the U.S. The Federal Reserve's monetary policy committee will meet on January 25 and 26 and investors are banking on a rate hike cycle starting in March.

In terms of economic indicators, the ZEW index for Germany posted a solid increase, with significantly fewer cases of COVID expected by the summer. Across the Atlantic, manufacturing activity in the New York area contracted sharply in January, moving into negative territory for the first time since June 2020.

After the release of U.S. inflation figures last week, the euro seemed to trigger a bullish recovery signal. As a reminder, prices were consolidating inside an ascending triangle within a bearish channel.

The breach of $1.1370 and the exit from the top of the channel suggested a bullish restart towards $1.1530. However, the euro is being hit hard by rising bond yields, so all indications are that this is a bull trap.     

Indeed, the re-entry of the bearish channel with an incursion below $1.1370 reinforces this hypothesis. A close below this level is necessary to confirm the change in momentum, but nonetheless, the euro remains under pressure.

 (Chart Source: Tradingview 18.01.2022)

For the time being, we favor a “bull trap” scenario, so sellers should regain the psychological upper hand. As a result, a new wave of decline could not be ruled out. The bearish flow is starting to show strength, which opens the way for a market pullback towards $1.1270 and then $1.1180.

Disclaimer: This material has been created for information purposes only. All views expressed in this document are my own and do not necessarily represent the opinions of any entity.