The foreign exchange market is waiting for the last full week ahead of the Christmas holidays, which will be full of events, including the latest Fed meeting on monetary policy this year.
The defensive greenback came under pressure on Monday over hopes for a global economic recovery after the pandemic, strengthened by positive vaccine news and expectations of further fiscal stimulus in the US.
Investor sentiment also improved after the EU and the UK decided to extend Brexit negotiations.
The appetite for risk is fueled by the launch of a vaccination campaign in the United States with the goal of vaccinating more than 100 million people against COVID-19 by the end of March 2021.
Politicians in Washington continue to discuss a new aid package for the American economy. Market participants seem poised to back any deal and are hoping for a larger aid package when Joe Biden takes over the White House in January.
The electoral college is set to vote for the new leader of the United States on Monday, and, if there are no demarches from the Republican states, then Joe Biden will finally take over, and Donald Trump, according to the assurances given earlier, will admit defeat.
Thus, before the last meeting of the Federal Reserve this year, an important domestic political risk will be eliminated.
As for the FRS itself, investors still expect the regulator to expand monetary support measures. According to forecasts, the US Central Bank will reaffirm its commitment to soft monetary policy and emphasize the need for additional fiscal stimulus, which is still stalled due to disagreements between Republicans and Democrats. At the same time, in the opinion of most experts, an increase in the volume of the quantitative easing program on the part of the Fed is unlikely, but the structure of asset purchases may be revised in favor of longer securities in order to exclude an increase in Treasury yields at the far end of the yield curve.
The greenback is currently under pressure from expectations that interest rates in the United States will remain low for an extended period.
The USD index is trading down more than 0.5% on Monday, around 90.4 points, close to its 2.5-year low.
According to the US Commodity Futures Trading Commission (CFTC), over the past week, speculators have increased the volume of net short positions in dollars to the highest level since the end of September.
After retreating to 1.2100 in the previous trading session, the main currency pair started a new week on the rise, thanks to the wide weakening of the US dollar.
The bulls' gaze on EUR/USD is once again directed upward, and the level of 1.2200 acts as a short-term target for them.
In addition to the news around vaccines from COVID-19, the main currency pair is supported by expectations regarding the further expansion of the quantitative easing program by the Fed.
Additional purchases of Fed bonds, as a rule, cause an outflow of funds into risky assets and depreciate the USD rate.
If the US Central Bank follows its European counterpart to expand stimulus, the EUR/USD pair will continue to grow.
On the one hand, the prospects for mass vaccinations in the United States reduce the need to soften the Fed's policy, on the other hand, the current deterioration of the epidemiological situation in the country does not allow the regulator to consider the issue of curtailing incentives.
If the Fed maintains the status quo on monetary policy, including the size of the QE program, it is likely to disappoint the market and the dollar can regain its recent losses.
From the macroeconomic statistics for the coming week, which may have an impact on the dynamics of the EUR/USD pair, we should highlight the reports on retail sales and claims for unemployment benefits in the United States, as well as preliminary data on business activity in the Eurozone.