EUR/USD stays pressured around 1.1350 on mixed signals, US dollar recovery

• EUR/USD keeps pullback from seven-week top, grinds lower around intraday low of late.
• Market players struggle for clear direction as equity futures rise, yields rally.
• Omicron woes escalate but policymakers stay hopeful, ECB v/s Fed battle is the key for 2022.
• FOMC Minutes, US NFP will be crucial for this week’s calendar.

EUR/USD prints a dull start to 2022, down 0.25% intraday around 1.1345 during early Monday. The currency pair refreshed a seven-week high the previous day amid broad US dollar weakness. However, the market’s consolidation at the year-start sluggish session triggered the quote’s corrective pullback amid mixed concerns.

Among the major burdens weighing on the EUR/USD prices are the escalating fears concerning the South African covid variant, namely Omicron.

Covid infections in the bloc, as well as globally, refresh record at the latest, which in turn challenge the previous recovery hopes from the old continent. While portraying the covid data, Reuters said, “Worldwide infections hit a record high over the past seven-day period, with an average of just over a million cases detected a day between Dec. 24 and 30.” The news also mentioned, “Over 4,000 flights were canceled around the world on Sunday, more than half of them were the US flights, adding to the toll of holiday week travel disruptions due to adverse weather and the surge in COVID-19 cases.”

Also challenging the market sentiment and favoring the US dollar’s rebound are the news concerning China’s troubled real-estate firm Evergande is on a halt. Additionally, the firm is also instructed by China government to abolish 39 illegal residential buildings. “China Evergrande Group shares will be suspended from trading on Monday pending the release of "inside information", said the firm per Reuters.

On the positive side, news that Germany will unveil tax relief to the locals in 2023 joined studies showing Omicron as less severe than the previous COVID-19 variants to challenge the EUR/USD bears.

Above all, the monetary policy divergence between the US Federal Reserve (Fed) and the European Central Bank (ECB) is the key to watch in the year 2022 as the Fed is likely running faster, than the ECB, towards the monetary policy tightening, which in turn could weigh on EUR/USD prices looking forward.

As a result, Wednesday’s Federal Open Market Committee (FOMC) Meeting Minutes and Friday’s US Nonfarm Payrolls (NFP) will be crucial for the pair traders. For the day, final readings of the US Markit Manufacturing PMI for December may offer immediate direction to markets.

Technical analysis

EUR/USD steps back from the 50-DMA and a horizontal area comprising multiple resistances since mid-November. Given the bullish MACD signals and the pair’s successful run-up beyond 21-DMA, EUR/USD buyers are likely to overcome the immediate hurdle surrounding 1.1390. However, a downward sloping trend line from early September, around 1.1440 by the press time, will be critical to watch for the bulls afterward.

On the contrary, pullback moves may aim for a 21-DMA retest, close to 1.1310 at the latest, before challenging an ascending support line from late November around 1.1250.