FX.co ★ EUR/USD: US dollar likely to pull back

In April, the US dollar index fell sharply, breaking through the key short-term support levels and questioning the uptrend in the US currency initiated earlier this year.

The greenback's collapse was so threatening, thus raising concerns among investors.

However, the US dollar cannot remain negative for long at a time when the yield on the US Treasury is rising, and the situation in the global markets is uncertain.

While US stocks are losing ground this week, the VIX has been up by 11%, surging to its April high, Bank of America noted.

Indeed, there are plenty of reasons for concern.

According to the WHO, the number of COVID-19 cases is growing in almost all regions of the world. At the same time, the most difficult epidemiological situation is in India which has rapidly occupied the second line in terms of the number of people infected.

The vaccination rollout is challenging again. Following the safety concerns over the AstraZeneca vaccine, similar difficulties have arisen with the drug from Johnson & Johnson. It seems to have a side effect in the form of thrombosis. Although this phenomenon is extremely rare, investors temper enthusiasm.

As a result, traders began to actively sell and lock in profits on long positions in the overheated markets, which had previously experienced steady growth for several weeks in a row.

The US dollar as a safe-haven asset was supported by the fact that stocks rebounded from record highs as coronavirus outbreaks from India to Canada have diminished the prospects for a rapid global economic recovery.

The US currency also benefited from a rise in the 10-year Treasury yields that surged from 1.528% (last week's low) to 1.631% on Tuesday.

After touching the lowest levels since March 3, the greenback managed to attract buyers in the area of 90.80-90.85.

Amid a return to risk aversion and demand for the safe-haven dollar, the EUR/USD pair failed to continue its upward movement and sank to 1.2000.

This week, the ECB meeting is in the focus of market participants. Its results will be announced on Thursday.

Until now, the EUR/USD rally was fueled by downward pressure on the US dollar and a shift in investor attention to growth prospects in Europe after vaccinations in the region picked up steam.

According to strategists at ABN Amro, traders are interested in the ECB's view on the outlook for the eurozone economy, namely whether the regulator's forecast is becoming more optimistic or not.

The pace of vaccination in the EU has accelerated markedly, especially in Germany and Spain, where the total number of people who had received the first dose of the drug increased by more than 50% in the first half of April. This gives hope that the eurozone economy will be able to get back on track in the second half of this year.

There are also growing expectations among market participants that the ECB will slow down its the asset purchase programme in the third quarter. Along with better growth prospects, this will help lift bond yields in Europe and drag the euro up.

In the meantime, the situation remains rather gloomy. In October-December last year, the currency bloc's gross domestic product contracted by 0.7%. At the end of the first quarter of 2021, the eurozone economy is likely to see a recession again due to lockdowns in the largest countries of the region. Two consecutive quarters of declines in GDP means falling into a technical recession.

Therefore, the most traders can expect from the ECB is cautious optimism. Most likely, the regulator will slightly change its rhetoric and make it clear that the eurozone economy still needs monetary incentives.

The central bank's decision on monetary policy will be published shortly before the release of data on business activity in the euro area, which will hardly please bulls of the EUR/USD pair.

Given the recent spike in COVID-19 cases in the Old World and the continued quarantine restrictions in some of the region's top countries, the eurozone purchasing managers' indices are expected to decline in April.

The manufacturing PMI is anticipated to fall to 62.0 from 62.5 recorded in the previous month, while the services PMI will most likely drop to 49.1 from 49.6 in March.

While some experts consider the current decline in the euro to be a temporary phenomenon and expect the EUR/USD to resume its rally towards the recent highs, others believe that the main currency pair will soon go down along the downtrend initiated in January.

At the moment, the EUR/USD pair is trading below the resistance area of 1.2100-1.2130. If the price breaks through the level of 1.1910 (200-day moving average) and consolidates below it, the quotes will drop to 1.1760 (the 78.6% Fibonacci retracement of its November-January rally) and then to 1.1705 (March low).

If the price breaks above 1.2130, the pair will have every chance to continue its rally. The next strong resistance levels are 1.2080 (April high), 1.2240, and 1.2350.