FX.co ★ Will US dollar take advantage of current situation?

The US dollar has the chance to go on the upside in the week before Christmas, as investors are wary that Omicron could lead to a new lockdown in the United States.

The US dollar has the chance to go on the upside in the week before Christmas, as investors are wary that Omicron could lead to a new lockdown in the United States. Concerns over Omicron dominated the headlines at the end of last week and prompted a slump in the stock market on Monday.

While the US could limit the new restrictions and avoid a strict lockdown, governments in Europe are forced to take harsh measures.

The Netherlands is under a full lockdown until January 14, 2022. Germany is not currently planning a lockdown, but the German authorities have stated that stricter measures would be necessary. The UK does not rule out a lockdown, with future restrictions depending on the situation in the upcoming days. Investors are concerned the new restrictive measures could lead to a fall in consumer activity in the run-up to the winter holidays.

Dr Tedros Adhanom Ghebreyesus, Director General of the WHO, stated the pandemic could be over next year only if 70% of the world's population would be vaccinated by mid-2022.

An increasingly hawkish policy shift by central banks around the world is fueling pandemic fears. With many economies already being in a precarious state, the end of stimulus could jeopardize the fragile economic recovery.

The unease among market players are boosted by rumors that the Federal Reserve would raise interest rates in March, and not mid-2022 as previously anticipated.

Goldman Sachs has already revised its outlook for US GDP growth in 2022 downwards: from 3% to 2% in the first quarter, from 3.5% to 3% in the second, and from 3% to 2.75% in the third.

Interest rate hike expectations coupled with pandemic risks could raise demand for the US dollar as a safe-haven asset. USDX is already hovering near yearly highs, but it remains under pressure from falling US treasury yields.

On Tuesday, the steadily rising demand for risk assets encouraged Euro bulls, with EUR/USD rising at the beginning of the European session. However, its upside movement is based only on the temporary weak position of the US dollar. The pair has repeatedly failed to settle above 1.1300.

The Fed's hawkish outlook combined with a forecasted rise in US treasury yields should boost the US dollar further and put pressure on EUR/USD, analysts say.

Uncertainty over Omicron and the blow received by US president Biden's $1,75 trillion social spending package in Congress could likely limit the upside movement in the stock market, pushing the demand for USD up.

The euro could still break below the 1.1200-1.1350 range, however.

Investors could be more passive in the coming days amid low market liquidity in the run-up to winter holidays. Market players are advised to remain cautious due to a lack of data releases in the EU and the US.

The support levels are located at 1.1240, 1.1200, and 1.1170, while the resistance is at 1.1310, 1.1340, and 1.1375.