Title: EUR/USD Under Pressure: Recovery Attempts Falter as Bears Remain in Control
Author: Based on original analysis by Pablo Piovano, FXStreet
The EUR/USD currency pair continues to show signs of vulnerability after experiencing a brief uptick earlier in the week. While some traders hoped for a sustained recovery following the pair’s bounce from recent lows, the euro’s strength remains limited against the US dollar, suggesting underlying bearish sentiment still dominates the market. Current macroeconomic conditions, coupled with central bank divergences and broader risk-off sentiment, create a fragile backdrop for any meaningful bullish momentum in the near term.
This article expands on the key points raised by Pablo Piovano in his FXStreet article, incorporating additional insights from other market analysts and recent economic data to provide a comprehensive outlook on the near-term and medium-term direction of the EUR/USD pair.
Recent Price Action and Market Behavior
– The EUR/USD pair has been trending lower over the past few weeks, recently testing support near the 1.0450 zone.
– After reaching multi-month lows, the pair attempted to rebound, rising briefly above the 1.0500 psychological level.
– Despite this recovery, the upside has been largely capped, with sellers appearing near each rally, indicating limited buying motivation.
Reasons Behind the Weak Recovery
Several factors contribute to the euro’s inability to sustain gains against the dollar:
1. Federal Reserve Hawkishness:
– The US Federal Reserve has maintained its hawkish bias, signaling that interest rates may remain higher for longer.
– Fed officials, including Chair Jerome Powell and key voting members, have repeatedly emphasized the need to keep inflation under control, even if it requires tighter monetary policy.
– The Fed Funds Rate currently lies in the 5.25 percent to 5.50 percent band, with expectations of one more rate hike by the end of the year remaining intact.
– This contrasts starkly with the European Central Bank (ECB), which is facing growing concerns over slowing growth across the Eurozone.
2. Diverging Central Bank Policies:
– The ECB recently paused its rate hike cycle following ten consecutive increases, bringing the key deposit facility rate to 4.00 percent.
– ECB President Christine Lagarde has signaled a data-dependent policy approach moving forward, indicating reluctance to tighten monetary policy further in the near future.
– Inflation in the Eurozone continues to fall from its peak, with both headline and core Consumer Price Index (CPI) readings showing a downtrend, weakening the case for aggressive ECB action.
– The combination of fading inflationary pressure and weakening economic activity across major Eurozone economies places the ECB in a tightening dilemma.
3. Weak Eurozone Economic Data:
– The latest figures from Eurostat and national statistical agencies reflect a troubling slowdown across the bloc.
– Recent Purchasing Managers’ Index (PMI) data for services and manufacturing revealed contraction in both sectors.
– Germany’s export figures and industrial production data have also disappointed, with the country teetering on the edge of recession.
– Consumer confidence and economic sentiment remain subdued, likely weighing on demand and domestic investment.
4. Energy and Geopolitical Uncertainty:
– The Eurozone remains vulnerable to energy price fluctuations, especially during the winter season.
– While 2023 saw relatively mild weather and strong liquefied natural gas (LNG) imports, the region is not fully insulated from supply shocks.
– The war in Ukraine continues to create geopolitical uncertainty near Europe’s borders, impacting investor confidence in euro-denominated assets.
5. Strong US Dollar Backed by Safe-Haven Demand:
– With global equities wobbling and risk sentiment deteriorating, traders are seeking the safety of the US dollar.
– The US economy continues to outperform other developed markets, with GDP growth exceeding expectations and labor market resilience supporting consumer spending.
– Treasury yields have risen across the curve, particularly the 10-year benchmark, often attracting capital
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