Over the past two months of 2020, the US currency has depreciated by almost 5%, and most market participants were betting on a further weakening of the greenback in 2021.
As Democrats won the Senate elections in Georgia on January 5, they can now resort to any measures, including the allocation of trillions of dollars in order to support the US economy undermined by the coronavirus.
This event has led to a sell-off in the US government bonds and a sharp rise in Treasuries yields which helped pause the dollar's decline.
Having bounced off the level of 89.2, its lowest value in almost three years, the USD index rose to 90.7.
Experts say the reversal of the US dollar may continue until the Treasuries yields return to average annual values of around 2.5%, which is also close to the Fed's inflation target.
This means that the market is only halfway through, and the greenback is likely to maintain the uptrend.
In the coming weeks, USDX may well rise to the level of 92.
At the same time, analysts warn that the US currency is unlikely to stay in the uptrend in the long term. Therefore, traders should be cautious when betting on the USD rise.
"There is little evidence confirming the sustained growth of the US dollar. The Treasuries yield curve remains very steep. The uncertainty in the global economy is decreasing, and the global outlook is improving. Therefore, any rally in the US dollar will be limited," strategists at Deutsche Bank said.
The outlook for EUR/USD is neutral. The pair is expected to enter a long consolidation period in the range of 1.2000-1.2500, given that the United States is ahead of the EU in terms of vaccinations.
The single European currency is showing remarkable resilience even though new quarantine measures raise fears of a double recession in the region.
The same happened last autumn when the EUR/USD pair shrugged off the first signs of a second wave of the pandemic. The pair may face significant correction, but only in case of a steep fall in the US stock market. So, investors need to closely monitor any possible signs of a reversal in stock indices. These signals may come from the Fed.
Earlier, investors expected the US Federal Reserve to start controlling the long-term bond yields. Until now, the regulator has avoided direct instructions on this matter. A further rally in Treasuries yields may force the Fed to take this step. However, the next FOMC meeting is due in almost two weeks, and further plans of the regulator are still not unclear.
A surge in demand for the US dollar has already sent the main currency pair under the 1.2200 mark.
In case of a breakthrough of the psychologically important level of 1.2125, we may witness a deeper fall of EUR/USD. The next support level is found at 1.2000. The pair is unlikely to break through this mark without a strong driver.
The nearest strong resistance is located at 1.2230 and further at 1.2270 and 1.2310.