EUR/USD Drops as Safety Measures from China to Nations Trigger Volatility


The EUR/USD pair has sensed heat after a rebound move to near 1.0637 in the Asian session. The major currency pair has dropped marginally around 1.0620 as the risk-off impulse has regained traction after various nations announced the requirement for negative Covid-19 test reports of arrivals from China. This is expected to escalate supply chain disruptions as China is a leading trading partner with various nations in the world.

The US Dollar Index has turned sideways in a range of 104.26-104.40 after a correction in the early trade from a four-day high around 104.56. Meanwhile, S&P500 futures have not displayed any recovery move after a two-day sell-off, portraying a risk-aversion theme underpinned by the market participants. The return on the 10-year US Treasury bonds is facing pressure and has dropped to near 3.86%.

The pace of reopening of the Chinese economy adopted by the respective administration has spiked the number of infections, which has dismantled the idea of easing supply chain disruptions. According to CNN News, the United States will require all travelers from China to show a negative Covid test result before flying to the country, effective from January 5.

Meanwhile, Italy announced that it will commence testing all arrivals from China for Covid and urges European Union countries to follow suit, after the 50% positive test rate on China flights in Milan. Fresh concerns about the Covid situation in China are likely to keep the US Dollar Index on a positive trajectory.

On the Eurozone front, the trading bloc is concluding the CY2022 on a high inflation note, which will keep the European Central Bank (ECB) policymakers busy in finding ways to tame the Consumer Price Index (CPI). This week, ECB Governing Council member, as well as Dutch Governor, Klaas Knot warned for more policy tightening in the five policy meetings between now and July 2023 to contain firmer inflation. He further added that ‘The risk of us doing too little is still the bigger risk’.

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