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EUR/USD slides below 1.13 amid rising US yields

It looks like the USD might outperform the euro during the first trading days of the new year.

The USD continued to firm on Tuesday as rising US yields helped keep the greenback in demand. At the time of writing, the EUR/USD pair dropped below 1.13, completely erasing last week’s gains.

January kicked off negatively for US bonds, as traders continued to sell bonds, increasing their yields. As a result, the two-year yield rose above 0.8% for the first time since March 2020.

At the same time, the 10-year US yield jumped beyond the 1.6% mark, while the 30-year yield managed to rise above the 2% threshold.

Hawkish Fed expectations

The market now expects the Fed to raise rates in Q1, while two more rate hikes are seen as very likely in the second half of the year.

According to economists at DBS Bank, the US dollar is likely to be supported into the two Fed hikes they expect in 4Q22. The US dollar appreciation in 2022 will be less aggressive and choppier than that seen in the second half of 2021.

Based on past experiences, we expect the DXY to strengthen into the first Fed hike and depreciate after that, they added.

European data in focus

Elsewhere, German retail sales accelerated to 0.6% month-on-month, against expectations of a decline from 0.5% to -0.5%. On the other hand, the yearly change remained at -2.9%.

Additionally, in December, the German unemployment rate ticked lower to 5.2% (from 5.3% previously), while the unemployment change improved to -23,000, from -34,000 in November.

At the same time, inflation in France decreased slightly in the last month of 2021, according to the preliminary data. As a result, the monthly CPI halved to 0.2%, but the yearly change stood unchanged at 3.4%.

Later today, the ISM manufacturing PMI for December will be released, forecast to decelerate mildly to 60.1, down from 61.1 previously. The inflation subindex will likely decline too.

Technically speaking, the intraday support seems to be in the 1.1260 area. Still, it looks like the euro will decline to December lows in the 1.12 region. If we see a breakdown below that level, it might hit some large stop-losses, likely pushing the single currency quickly toward the psychological 1.10 level.

Alternatively, the euro needs to climb above 1.13 to stabilize short-term, while the resistance remains in the 1.1380 area.

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