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The EUR/USD Gradually Approaches The Mid-1.0500s On The Strength Of The USD; However, The Upside Appears Limited
Support is provided by a modest USD decline as EUR/USD advances higher during the Asian session. Uncertainty regarding the trajectory of future rate hikes by the Federal Reserve restrains the USD and US bond yields. The possibility that the ECB has completed raising interest rates could deter investors from placing aggressive bullish wagers.
The EUR/USD pair finds some support between 1.0525 and 1.0520, in the vicinity of the weekly low, and advances marginally during the Asian session on Friday. Presently, spot prices are fluctuating in the vicinity of 1.0535-1.0540, exhibiting a daily increase of marginally over 0.10%. This appears to have temporarily halted the overnight retracement decline from a level not seen in nearly three weeks.
In fact, the EUR/USD pair recorded its steepest single-day decline since early October on Thursday, as US consumer inflation data reignited expectations for another Federal Reserve (Fed) rate rise in 2023 and bolstered demand for the US Dollar (USD). Consistent headline and core CPI readings in excess of the Fed's target of 2% bolster the likelihood of additional policy tightening. As a result, overnight yields on US Treasury bonds increased sharply, sparking an enormous USD short-covering rally.
However, recent dovish statements from a number of Fed officials indicated that the rate-hiking cycle of the United States central bank is nearing its conclusion. As a result, US bond yields remain subdued and the USD is unable to benefit from its strong recovery from a two-week high the day before. In addition to this, a slight increase in US equity futures undermines the safe-haven dollar and provides an impetus for the EUR/USD pair, although a substantial upward trend appears elusive.
Thursday, policymakers of the European Central Bank (ECB) conveyed a measured sense of optimism regarding the return of inflation to 2%, even in the absence of further interest rate increases. This follows the ECB's September indication that the tenth and final rate hike in its fourteen-month battle against inflation was probably the last. This, coupled with apprehensions that the economy was decelerating and potentially entering a recession, implies that additional rate increases by the ECB might not be feasible, which ought to restrict the EUR/USD pair.
Presently, market participants await the remarks made by ECB President Christine Lagarde during a panel discussion at the Annual Meeting of the World Bank Group and the International Monetary Fund in Morocco. This could potentially impact the shard currency and give the EUR/USD pair some momentum. In addition to the preliminary Michigan Consumer Sentiment Index and Philadelphia Fed President Patrick Harker's speech, which will influence USD demand, traders will also consider the speech.
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