- EUR/USD drifts lower for the second straight day amid resurgent USD demand.
- Hawkish Fed expectations and the cautious mood boost the safe-haven buck.
- Reduced bets for more aggressive ECB rate cuts could limit any further losses.
The EUR/USD pair faced significant selling pressure on Wednesday, plunging to a one-week low during the early European session. Despite a slight bounce below the 1.0800 level, a substantial recovery remains elusive as the US Dollar (USD) gains momentum, fueled by growing conviction among investors that the Federal Reserve (Fed) will delay interest rate cuts until the June policy meeting. The strengthened demand for the safe-haven USD is further supported by a shift in global risk sentiment.
However, potential headwinds for the USD bulls include a renewed decline in US Treasury bond yields, which might temper aggressive bets. Additionally, diminished expectations for a swift reduction in borrowing costs by the European Central Bank (ECB) could provide support to the shared currency, restraining further downside for the EUR/USD pair.
Investors appear cautious ahead of crucial inflation data releases from both the Eurozone and the United States. Thursday will see the unveiling of flash CPI estimates from Germany, France, and Spain, followed by the US Personal Consumption Expenditures (PCE) Price Index. The Eurozone inflation figures on Friday will play a pivotal role in influencing the Euro’s trajectory and could impact the EUR/USD pair ahead of the ECB meeting on March 7.
In the interim, traders are likely to seek cues from the Preliminary US Q4 GDP print and speeches by influential FOMC members on Wednesday. These events are anticipated to contribute to short-term trading opportunities around the EUR/USD pair.
Daily digest market movers: Bears seize intraday control amid strong pickup in the USD demand
The EUR/USD pair faced its second consecutive day of declines on Wednesday, driven by the Federal Reserve’s hawkish stance on interest rates and a cautious market sentiment. Federal Reserve Governor Michelle Bowman’s remarks on Tuesday emphasized a reluctance to rush into interest rate cuts, indicating that the central bank may wait until June before implementing any changes. This has tempered investor appetite for riskier assets, particularly ahead of Thursday’s release of the US Personal Consumption Expenditure Price Index.
Despite concerns about a potential US government shutdown and disappointing US Durable Goods Orders reported on Tuesday, the USD continues to gain support from retreating US Treasury bond yields, placing downward pressure on the EUR/USD pair.
US President Joe Biden’s call for prompt Congressional action to avoid a government shutdown, coupled with a substantial 6.1% decline in orders for long-lasting US manufactured goods in January, contributes to the USD uptick. Additionally, the Conference Board’s Consumer Sentiment Index fell to 106.7 in February, reflecting concerns about a potential recession, despite declining inflation expectations. The Richmond Fed’s Manufacturing Index improved to -5 in February from -15 in the previous month but still showed the fourth consecutive month of negative readings.
Traders have adjusted their expectations for a swift reduction in borrowing costs by the European Central Bank, now anticipating less than 100 basis points of rate cuts this year, down from approximately 150 basis points at the beginning of February.
The upcoming focus is on consumer inflation data from Germany, France, and Spain on Thursday, followed by the Eurozone flash CPI print on Friday. These releases will likely influence the EUR/USD pair in the near term.
Technical analysis: Break below the 1.0785 horizontal support could pave the way for deeper losses
Analyzing the technical landscape, the recent stumble just shy of the 1.0900 level, followed by a dip below the 200-day Simple Moving Average (SMA), may signal a new trigger for bearish traders. However, it’s crucial to note that the oscillators on the daily chart have yet to confirm this negative outlook, prompting a degree of caution before taking positions on further losses. In this context, any additional decline is likely to encounter substantial support around the 1.0785 horizontal zone, acting as a pivotal level. A decisive break below this zone could potentially expose the EUR/USD pair to an accelerated descent, revisiting levels below 1.0700 or retesting the three-month low reached on February 14.
Conversely, the 1.0850 region appears to serve as an immediate resistance. A breach above this level could set the stage for the EUR/USD pair to launch a renewed attempt to surpass the 1.0900 psychological barrier. Continued buying momentum could facilitate a further short-term upward move, aiming to reclaim the 1.1000 psychological milestone for the first time since January 11.
