The main currency pair is showing increased volatility ahead of the Christmas holidays.
In the absence of significant releases for the eurozone, EUR / USD is trading under the influence of the dynamics of the dollar, demand for risk, as well as news from the coronavirus front and the situation around the next package of economic incentives in the United States.
The sudden dip in risk sentiment on Monday over reports of a new COVID-19 mutation triggered strong moves across asset classes. The greenback surged sharply against the backdrop of low market liquidity, while American stocks fell. However, afterward, everything went backward and quickly returned to its starting points.
In particular, the S&P500 index fell by 0.44% on Monday, although at some point there was a decline of 3.2%.
A similar situation was observed in the foreign exchange market, where the EUR/USD pair ended the first day of the week with a decline of 0.1%, although within the day its losses exceeded 1%.
On Tuesday, reports of the new COVID-19 strain continued to weigh on investor sentiment. The EUR/USD pair failed to capitalize on the previous day's rebound of more than 130 pips from three-day lows. Instead, it met an offer amid a broad strengthening of the US dollar, dipping below 1.2200, ending yesterday's trading near 1.2150.
The greenback rose by almost 0.6% on Tuesday, rising above 90.6 points. On Wednesday, it decreased by about 0.5%. The EUR/USD pair has managed to attract buyers around 1.2150 and is retesting the resistance around 1.2200.
Concerns about a new coronavirus mutation have begun to subside as representatives from the World Health Organization (WHO) said that already developed vaccines against COVID-19 should work against the new strain of the virus.
Meanwhile, the still acting President of the United States, Donald Trump, refused to sign the $900 billion economic aid package approved by the US Congress, demanding amendments to it.
The market does not yet really trust Trump and believes that the stimulus package will be adopted in one way or another in the very near future.
"The market's muffled reaction suggests that it is still awaiting the passage of the bill in one form or another," said strategists at Barclays.
"The adoption of a large stimulus package could lead to higher inflation in the US, making the US dollar less attractive to investors. Therefore, we expect the greenback to remain weak," they added.
It is assumed that in this case, the USD will remain at its lows until the end of the year, and the main currency pair will make more than one attempt to approach the 1.2300 mark.
If the approval of fiscal stimulus in the US fails, it will benefit the dollar, as investors will again be forced to turn to it as a safe haven asset.
In this scenario, the EUR/USD pair may sink to the area of 1.2000-1.2100, and a more active sell-off of risky assets can lead it to 1.1800.