The EUR/USD pair is trading without any strong drivers. It seems that only the risk-on sentiment is moving the pair now. It is hard to say whether a higher risk appetite helped the European currency or it was just a coincidence. Amid such a thin market, all explanations will be unconvincing.
However, there is certain logic behind this: the US securities market appreciated, long-term government bond yields, oil and gold also look noticeably stronger, while the US dollar weakened. Naturally, the euro has no other choice but to rise in the given range.
We should also keep in mind that amid the lack of news and fundamental events, the market can quickly react with a sharp move even to the smallest message. Meanwhile, there are some other issues that the euro traders prefer to downplay for now. Amid the gas crisis in Europe, a surge in new coronavirus cases, and a possible recession in the Eurozone, traders could have gone short on the euro, but this is not happening. By the way, EUR ignored the decline in the EU economy a year ago and it is repeating the same scenario today.
Everyone is already tired of the sideways channel the pair has been stuck in. It will be possible to leave the channel only when the US dollar declines notably. One factor that can push the greenback lower is the rise in US Treasury yields. If long-term government bond yields grow, the American debt market will see an outflow of capital. This will result in USD declining against the basket of other majors, including the euro.
All these assumptions are difficult to confirm now. Honestly, a decline in the US dollar is highly unlikely as both technical and fundamental factors confirm its strength. The short-term outlook for the EUR/USD pair remains mostly bearish. A breakout of the 1.1250 level will support sellers who will try to break below 1.1200.
Support is found at 1.1250, 1.1210, 1.1185 while resistance is located at 1.1345, 1.1380 1.1425.
Three scenarios for EUR/USD
The range of 1.1200-1.1350 looks quite stable, which gave confidence to traders ahead of the Christmas holidays. The pair is approaching the boundaries of the channel from time to time, and at some point, it will definitely break through it. Perhaps this will happen in the very near future before the New Year. The pair may not break through the level of 1.1200 although the downward movement looks more real.
An upside breakout is also likely given the traditional weakness of the US dollar in the thin market. This has been the case for the past four years. Besides, the greenback has recently been overvalued thanks to positive factors in the past and optimistic expectations in the future.
So, in the first scenario, the pair will slightly decrease within the current range. In the second scenario, the euro may exit the channel. Finally, in the third case, everything will remain unchanged until the beginning of 2022.
The third scenario seems more realistic as it is difficult to predict a proper upward movement on the euro now. As long as EUR/USD is trading below 1.1400, no uptrend is possible. The quotes have to retest the lows before targeting the 1.2000 level. The pair is likely to reach this level in the second half of the next year.