EUR/USD Stays Above 1.0950 On USD Pullback, Lacks Momentum
EUR/USD gains some ground for the second day in a row as USD weakens slightly. The different outlooks for the Fed and the ECB favor the major currency pair and support its rise. However, the upside potential is limited before the US consumer inflation data on Thursday.
The EUR/USD pair maintains a positive tone for the second consecutive day on Tuesday, but fails to break out of the previous day’s trading range. The pair trades above 1.0950 during the Asian session, supported by a softer US Dollar (USD).
The USD Index (DXY), which measures the Greenback against a basket of currencies, falls further from a nearly three-week high reached last Friday amid expectations of a near-term change in the Federal Reserve’s (Fed) policy direction. The expectations were influenced by a report from the New York Fed on Monday, which showed that US consumers’ inflation expectations for the short term dropped to the lowest level in almost three years in December. This, along with a positive mood in the Asian stock markets, weakens the demand for the safe-haven USD and helps the EUR/USD pair.
The common currency, on the other hand, benefits from expectations that the European Central Bank (ECB) will keep interest rates at record lows for a while, reinforced by the expected surge in the Eurozone inflation last month. Additionally, ECB official Boris Vujcic said on Monday that the central bank does not expect to cut interest rates before the summer and expects a gradual decline in inflation in the Eurozone. However, the markets have already factored in a 25 basis points (bps) ECB rate cut by April, which, in turn, weighs on the EUR/USD pair.
Furthermore, the US monthly employment report released on Friday showed a strong labor market and gave the Fed more room to keep interest rates higher for longer. Also, the recent less dovish comments by several Fed officials made investors reduce their expectations for more drastic policy easing and early interest rate cuts, which supports higher US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond stays above 4.0% and should limit any significant downside for the USD.
The above-mentioned mixed factors suggest that it is wise to wait for a clear bullish signal before betting on any further rise for the EUR/USD pair. Traders now await the release of German Industrial Production, French Trade Balance data and the Eurozone Unemployment Rate for some clues. Later in the US session, a scheduled speech by Governor Michael Barr might offer some short-term opportunities, though investors might want to wait for the latest US consumer inflation figures on Thursday.
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