EUR/USD Forecast: Euro looks fragile despite recovery attempt

EUR/USD has staged a rebound following Friday’s sharp drop.
Euro could struggle to find demand amid lockdown fears.
Greenback is staying on the back foot as US Treasury bond yields decline.
EUR/USD has gained traction after spending the first half of the day in a tight channel around 1.1250 and was last seen trading in the positive territory around 1.1270. The pair, however, could find it difficult to extend its recovery as it remains at the mercy of the dollar’s market valuation.

The risk-averse market environment at the start of the week is weighing on the US Treasury bond yields and not allowing the greenback to build on Friday’s impressive gains. The benchmark 10-year US T-bond yield is falling nearly 1.5% on the day and the US Dollar Index is posting modest losses near 96.50, reflecting the modest dollar weakness.
With central bank meetings out of the way, the risk perception became the primary market driver at the start of the week. Investors are increasingly concerned that newly imposed Omicron-related restrictions will hurt the global economic activity just when policymakers are taking decisive steps toward policy tightening in major economies.

Nevertheless, the eurozone looks closer to introducing stricter measures to slow the spread of the virus while the US continues to resist the possibility of a full lockdown, suggesting that the shared currency could turn fragile against the dollar.

Meanwhile, comments from European Central Bank officials support the view that the fundamental outlook continues to favour the dollar over the common currency. European Central Bank (ECB) Governing Council member Mario Centeno argued against the idea that COVID restrictions would lead to an increase in inflation. Additionally, ECB Governing Council member and Spanish central bank chief Pablo Hernandez de Cos reiterated that a rate hike in 2022 was unlikely.

EUR/USD Technical AnalysisThe Relative Strength Index (RSI) indicator on the daily chart rebound toward the 50 area after dipping below 30 late Friday, suggesting that the bearish pressure has lost strength since then. However, the pair continues to trade below its 100-period and 50-period SMAs on the same chart and buyers could remain on the sidelines until this area turns into support.

Initial resistance aligns at 1.1300 (psychological level, 50-period SMA, 100-period SMA) ahead of 1.1320 (static level) and 1.1340 (200-period SMA).

On the downside, 1.1240 (static level) is the first support before 1.1220 (December 15 low) and 1.1200 (psychological level, static level).