EUR/USD set for third straight monthly decline as US bond yields rise

The EUR/USD is on track for the third straight monthly decline as the US dollar makes an impressive comeback. It is trading at 1.1745, which is 5% below the highest point this year.

Stronger dollar pushes euro lower

The EUR/USD price has dropped for several reasons. The most notable one is that the US dollar has recovered impressively from its lowest level in 2020. The dollar index, which weighs the greenback against a group of peers, has bounced back by more than 3% this year.

The dollar has strengthened because of the ongoing recovery of the US economy. For one, the US government has already passed a stimulus package worth more than $2.8 trillion this year. The Fed has also printed more than $360 billion through its open-ended quantitative easing program.

Further, reputable media sources say that the Biden administration is proposing another $3 trillion infrastructure package. In theory, all these measures should push the US dollar lower.

However, generous spending will, in theory, lead to higher inflation, which will in turn lead to higher interest rates. While the Fed has opposed higher rates, analysts believe that the bank will either hike or turn hawkish later this year. A hawkish Fed tends to be better for the US dollar.

The EUR/USD has also declined because of the divergence between the US and the European Union on vaccinations. In the past few months, the American government has vaccinated millions of people, and the Biden administration hopes the country will reopen fully in summer.

The story has been different in the European Union, where member states have exported more vaccines than those they have administered. This divergence has seen the EU deliver weaker employment and inflation numbers than the US.

EUR/USD forecast

The three-hour chart shows that the EUR/USD managed to move below the lower side of the parallel channel on March 24. Since then, it has dropped by almost 1%. The pair remains below the short and longer-term moving averages and is slightly below the middle line of the Bollinger Bands. Therefore, in the near term, the pair may keep falling as bears target the next key support level at 1.1600. However, a rally above the important resistance at 1.1836 will invalidate this trend. You can trade these moves using popular forex brokers.