EUR/USD Analysis: 1.2300 capping gains amid COVID-19 jitters, Georgia election worries

• Sustained USD selling bias assisted EUR/USD to gain strong positive traction on Monday.
• A turnaround in the risk sentiment benefitted the safe-haven USD and capped the upside.
• The technical set-up warrants some caution before placing any aggressive directional bets.

The EUR/USD pair caught some fresh bids on the first trading day of 2021 and retested 32-month tops, albeit once again struggled to find acceptance above the 1.2300 mark. Hopes for a sharp global economic recovery this year, along with expectations of additional US financial aid package remained supportive of the underlying bullish sentiment across the global financial markets. Adding to this, speculations that the Fed will keep rates lower for a longer period further undermined the safe-haven US dollar and was seen as a key factor behind the pair's goodish intraday positive move.

The shared currency was able to sustain gains despite a modest downward revision of the Eurozone Manufacturing PMIs. The readings, however, reflected the resilience of the manufacturing sector, which could act as crucial support to the economy and help offset the impact of any further decline in the services sector. That said, news that Germany is extending its lockdown until January 31 added to market concerns about the continuous surge in new COVID-19 cases. Apart from this, a turnaround in the US equity markets provided some respite to the USD and capped gains for the major.

Investors turned cautious amid doubts about the effectiveness of vaccine on a new coronavirus strain coming from South Africa and uncertainty about the runoff elections in Georgia. This, in turn, fueled demand for the perceived safe-haven greenback and led to the pair's intraday pullback of around 65 pips. Meanwhile, the downside remained cushioned and the pair managed to regain some positive traction during the Asian session on Tuesday. In the absence of any major market-moving economic releases from the Eurozone, the USD price dynamics should play a dominant role in influencing the pair.

Later during the early North American session, the releases of the ISM Manufacturing PMI will also be looked upon for some trading impetus. The key focus, however, will remain on developments surrounding the coronavirus saga, which remains an exclusive driver of the broader market risk sentiment.

Short-term technical outlook

From a technical perspective, repeated failures near the 1.2300 mark could be seen as the first signs of bullish exhaustion. That said, the pair so far has managed to defend a two-week-old ascending trend-line support. This makes it prudent to wait for a sustained break through the mentioned support, currently near the 1.2230-25 region, before positioning for any further corrective fall. The pair might then slide below the 1.2200 mark and aim to test the 1.2130-25 congestion zone. The latter should act as a key pivotal point and help determine the pair’s next leg of a directional move.

On the flip side, the 1.2300-1.2310 region might continue to act as a key barrier. A sustained strength beyond will be seen as a fresh trigger for bullish traders and pave the way for an extension of the recent strong upward trajectory. The momentum has the potential to push the pair further beyond mid-1.2300s, towards reclaiming the 1.2400 mark for the first time since April 2018.