Original article by VT Markets
Source: https://www.vtmarkets.com/live-updates/the-eur-usd-pair-hesitates-around-1-1720-having-dropped-from-late-decembers-highs-above-1-1800/
—
EUR/USD Remains Under Pressure After Retreat from December Highs
The EUR/USD currency pair has encountered notable downward pressure in recent sessions, falling from highs observed in late December above the 1.1800 mark to hover near 1.1720. This shift reflects a combination of technical exhaustion and prevailing macroeconomic factors that are impacting both the US dollar and the euro. With investor sentiment fluctuating and upcoming economic releases in view, the near-term trajectory of the pair remains uncertain, though the broader context hints at cautious optimism for the greenback.
Current Market Overview
– The EUR/USD pair is currently consolidating around the 1.1720 level, a significant retracement from the highs reached in late December 2023.
– On December 28, the pair peaked slightly above 1.1800, marking a substantial bull run that found support as markets priced in the likely conclusion of the Fed’s rate-hiking cycle.
– Since then, the pair has entered a corrective phase, citing investor caution ahead of high-impact US macro data, worsening Eurozone growth prospects, and a general rebalancing of risk assets.
The Greenback Sees Renewed Bids
– US dollar strength in recent trading has acted as a key driver of the EUR/USD pair’s retracement.
– After losing ground throughout much of Q4 2023, the dollar has bounced back, supported by firmer US yields and safe-haven demand.
– The US Dollar Index (DXY), a key gauge of dollar strength relative to a basket of six currencies, advanced from lows around 100.80 to levels above 102.00 at the time of writing.
– Rising Treasury yields, particularly on the 10-year note, have reinforced the dollar’s recovery. The yield rose from under 3.8 percent in December to over 4.0 percent in early January, underscoring market adjustments to stronger US data.
Macroeconomic Drivers Impacting the Euro
While the dollar is regaining strength, the euro faces headwinds from several fronts:
– Soft economic data from Germany and other major Eurozone economies, including weaker-than-expected manufacturing output and a contraction in consumer spending.
– The European Central Bank’s (ECB) policy stance has grown increasingly dovish compared to the Federal Reserve, with markets now pricing in earlier rate cuts in 2024.
– Disinflationary trends in the bloc, along with mounting fiscal stress across southern Europe, have reinforced calls for the ECB to loosen policy.
– As a result, yield differentials between Eurozone and US bonds have widened in favor of the dollar, contributing to the EUR/USD downswing.
Key Drivers and Sentiment Analysis
Several pivotal themes continue to weigh on the EUR/USD cross, including monetary policy divergence, inflation trends, and market sentiment around growth prospects.
US Economy Shows Resilience
– The US economy continues to defy slower growth expectations, supported by robust labor market figures, stable inflation, and resilient consumer spending.
– December’s nonfarm payroll numbers, though slightly below expectations, still presented evidence of a tight labor market, reducing urgency for a near-term Fed pivot.
– The latest ISM manufacturing and services PMI readings pointed to a continued, albeit slow, expansion in activity.
– Headline inflation remained above the Fed’s target, with the December Consumer Price Index (CPI) rising 0.3 percent month-on-month, suggesting that the Fed may delay rate cuts longer than the market initially anticipated.
ECB Faces Growing Economic Weakness
– In contrast, the ECB is contending with signs of stagnation in the Eurozone.
– Germany narrowly avoided a technical recession in Q4 2023, but business confidence remains fragile,
Read more on EUR/USD trading.