Ahead of the two-day Fed meeting, the main currency pair continues to balance between news about COVID-19, a vaccine against the virus, the possible introduction of new quarantine restrictions in the eurozone, and the incentive package in the United States.
COVID-19 infections continue to skyrocket in several European countries as well as in the United States.
This allows the defensive greenback to periodically counterattack the positions of its main competitors, including the euro.
On the other hand, there are hopes that the coronavirus vaccines under development will allow the world to return to normal economic activity sooner.
On Monday, vaccination against COVID-19 began in America using a drug created by pharmaceutical companies Pfizer and BioNTech.
The European Medicines Agency is expected to approve the vaccine from Pfizer and BioNTech by December 29, and the Moderna vaccine by mid-January.
According to ECB President Christine Lagarde, the pandemic could provoke additional economic hardship, despite encouraging news about vaccines.
"It will take time before large-scale immunity is achieved. That said, further acceleration in the growth of morbidity and challenges to public health and economic prospects cannot be ruled out, "she said.
Recall that last Thursday, the European regulator increased the volume of the emergency asset purchase program (PEPP) by € 500 billion, to € 1.85 trillion and extended the program by 9 months until March 2022.
Following the December meeting of the ECB, the euro managed to gain a foothold above the $ 1.21 mark.
"The tone of the ECB December meeting was somewhat hawkish compared to our expectations. The regulator "strengthened" the preservation of incentives, including increasing the size of the PEPP program, as well as recalibrating a number of other instruments, in particular the terms of LTRO and reinvestment. However, it also meant a turn away from buying quantity-oriented assets, "said strategists at Citigroup.
However, the ECB made its shot, the next step for the Fed. The next meeting of the American regulator should take place on December 15-16.
There is no consensus among experts on what decisions the Fed will make this week.
Most market participants are inclined to believe that following the results of the two-day meeting, the FOMC will increase the volume of the asset purchase program and expand the range of maturities of the bonds purchased. It is also expected that in its signals to the market, the Fed can link monetary policy to specific targets that it is intended to achieve.
The only thing that analysts have no doubts about this week's FOMC meeting is that the federal funds rate remains in the 0-0.25% range.
At the same time, other aspects of the meeting, starting with the announcement following the meeting and ending with the press conference of the head of the Fed, Jerome Powell, still raise questions.
"At least the regulator should clarify its intentions. Given that the American economy is losing momentum for recovery, and Congress has not yet adopted a package of new fiscal stimulus measures, it is possible that the Fed will have to go beyond the boundaries of communication policy this week. However, most likely, the Central Bank will prefer to wait for the situation around the outcome of the elections and the adoption of new measures of fiscal stimulus, and only then make decisions on monetary policy, "Rabobank experts say.
On Monday, members of the electoral college confirmed the election of Democratic candidate Joseph Biden as President of the United States. However, according to experts, the second round of elections to the Senate from the state of Georgia, which will be held in early January, is even more important, since its results will depend on whether the Democrats will be able to change the balance of power in Congress in their favor, having the opportunity to start implementing their fiscal initiatives.
Bipartisan talks on a new stimulus package in the US remain the focus of investor attention.
American lawmakers are currently talking about dividing the next $ 908 billion stimulus package in two, in order to theoretically facilitate the passage of at least some of them.
On Friday, Congress will be on a break, so time is limited.
News of progress in the fiscal stimulus negotiations in Washington could boost market sentiment and put pressure on a safe dollar. The deal will also be a relief for the US Central Bank, which on Wednesday will unveil its latest rate decision this year.
In anticipation of the announcement of the Fed's verdict on monetary policy, the main currency pair is showing a cautious attitude
The euro is up 4% since the beginning of November, reaching its highest level against the US dollar since April 2018. This is due to widespread dollar sell-offs, as well as hopes that a massive aid package from the EU-created coronavirus fund will boost the region's economy.
However, the main question now is how tangible the direct fiscal effect of the launch of the fund will be, given that a significant part of the funds will be allocated in the form of loans, the provision of which depends on certain budget parameters.
Greenback is on its way to its fourth unprofitable five days in a row. The main drivers of this dynamic are low interest rates and the start of mass vaccination in the United States.
On Tuesday, the USD index is trading around 90.5 points, holding close to the lowest levels in more than 2.5 years.
Meanwhile, the worsening epidemiological situation in the EU is not the worst news for the euro. Much worse is Germany's declaration of strict national isolation. An almost complete halt in the eurozone's largest economy threatens to undermine the single currency rally.
"The market is overloaded with long positions in the euro. This indicates the possibility of profit-taking on EUR/USD, especially in light of concerns that Germany may introduce new quarantine restrictions, and the economic indicators for the eurozone in the new year may worsen again," Rabobank said.
"Reduced risk appetite could push the EUR/USD pair to 1.1800 in the first quarter of 2021. However, in a 12-month perspective it may rise to 1.2300," the bank's experts predict.
In the meantime, the main currency pair remains in the phase of consolidation, trading in a narrow range of 1.2120-1.1270, but the Fed's monetary policy verdict may change this situation.
