**EUR/USD Extends Gains Above 1.1750 Amid ECB-Fed Policy Divergence**
*Adapted and expanded from the original article by FXStreet, with additional insights from market reports and analyst commentary.*
The EUR/USD currency pair is showing signs of strength in early 2024, trading above the 1.1750 mark as the European Central Bank (ECB) and the U.S. Federal Reserve continue down diverging paths of monetary policy. This divergence has been one of the key drivers behind the recent rally in the euro against the dollar, as investors respond to changing interest rate expectations in both regions.
Despite lingering uncertainties in global financial markets and a mixed performance in economic indicators, forex traders are closely watching central bank commentary and inflation trends, which remain pivotal in asset repricing and sentiment shifts heading into the first quarter of the year.
### Key Drivers of the EUR/USD Momentum
Several fundamental and technical factors have fueled the EUR/USD pair’s rise past the psychological barrier of 1.1750:
#### 1. Diverging ECB and Fed Policies
As highlighted in the original FXStreet article, the policy divergence between the ECB and the Federal Reserve is a central theme shaping the forex landscape:
– **Federal Reserve Shifts to Neutral-to-Dovish Stance**: Following aggressive rate hikes in 2022 and most of 2023 to combat surging inflation, recent Federal Open Market Committee (FOMC) meetings suggest the Fed is now leaning towards a “wait and see” approach. Core inflation has been moderating, and U.S. economic growth, while still positive, is showing signs of slowing down. As of December 2023, the Fed signaled fewer rate hikes in 2024 and even opened the door to potential rate cuts, depending on how inflation data evolves.
– **European Central Bank Maintains Hawkish Tone**: In contrast, the ECB continues to maintain relatively tight monetary policy, citing persistent inflation within the eurozone, especially in services and wage growth. ECB President Christine Lagarde emphasized that while inflation may decline closer to the 2% target in the medium term, recent data does not yet justify a loosening of constraints.
This divergence in central bank expectations has widened the yield differential between eurozone and U.S. bonds, putting upward pressure on the euro and weighing on the dollar.
#### 2. Market Repricing of USD
The U.S. dollar, once seen as the ultimate safe-haven currency, has entered a period of retracement:
– **2023 Rally Losing Steam**: The U.S. Dollar Index (DXY), which tracks the greenback against a basket of major currencies, peaked in late 2022 but has since taken a gradual downward trajectory. The market’s growing belief that peak U.S. interest rates are behind us has led to a rotation out of dollars and into higher-yielding or recovering assets, including the euro.
– **Falling Treasury Yields**: Benchmark 10-year U.S. Treasury yields have declined from their recent highs, adding pressure on the dollar. This is reflective of expectations that the Fed is nearing the end of its tightening cycle.
– **Risk-On Sentiment**: Global equities have stabilized, and risk appetite has improved heading into the new year, reducing demand for defensive dollar positions.
#### 3. Resilient Eurozone Economy
Despite geopolitical tensions and energy-related hurdles, recent data suggests the eurozone economy is showing resilience:
– **Slower Contraction**: While the euro area flirted with stagnation in late 2023, several indicators pointed towards stabilization. Eurozone services PMIs improved modestly, while industrial production contractions eased.
– **Inflation Trends**: Euro area consumer price inflation continued to moderate, but core inflation remains sticky, particularly in services. This has given the ECB reason to proceed cautiously with any discussion of loosening policy.
– **Germany’s Recovery Prospects**: As the largest Eurozone economy
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