- EUR/USD retreats after refreshing multi-month high amid a modest USD recovery.
- The US bond yields slump further amid Fed rate cut bets and should cap the USD.
- Diminishing odds for ECB policy easing in 2024 should act as a tailwind for the pair.
The EUR/USD pair surrenders its intraday gains to the highest level since August 10 and slides back below the 1.1000 psychological mark during the early European session on Wednesday. The US Dollar (USD) stages a modest recovery from a near four-month low, which, in turn, is seen acting as a headwind for spot prices amid slightly overbought conditions on the daily chart. The fundamental backdrop, however, remains tilted firmly in favour of the USD bears and supports prospects for the emergence of some dip-buying around the major.
Federal Reserve (Fed) officials hinted on Tuesday that the central bank is making progress on inflation and may be done or close to done raising borrowing costs. Fed Governor Christopher Waller – a known hawk – said that he was increasingly confident that policy is currently well positioned to slow the economy and get inflation back to the 2% target. Waller added that there are good economic arguments that if inflation continues to decline for several more months, it is possible to lower the policy rate. Separately, Fed Governor Michelle Bowman noted that the central bank would need to raise rates further if the incoming data indicate that progress on inflation has stalled, though said that policy was not on a preset course.
Taken together with other recent remarks from several Fed officials, the latest comments offer a clear signal that the central bank may be finished with the policy tightening campaign in a bid to slow demand and cool inflation. Moreover, the markets are currently pricing in at least a 40% chance that the Fed could begin easing its policy as early as March 2024 and a cumulative of 85 bps rate cut by December 2024. This, in turn, drags the yield on the benchmark 10-year US government bond to its lowest level since September 14, which, along with a positive risk tone, should cap the upside for the safe-haven buck. Apart from this, the diminishing odds of rate cuts by the European Central Bank (ECB) in 2024 should lend support to the EUR/USD pair.
ECB President Christine Lagarde said on Monday the bank's fight to contain price growth was not yet done. Echoing the view, Bundesbank Chief Joachim Nagel noted on Tuesday the ECB may need to raise interest rates again if the inflation outlook worsens and that the bank should not rush to ease policy too quickly after the steepest set of rate hikes on record. This, in turn, suggests that the path of least resistance for the EUR/USD pair is to the downside and any meaningful corrective decline might be seen as a buying opportunity. Traders now look to the prelim US GDP report, which is expected to show that the economy expanded by a 5% annualized pace during the third quarter as against the 4.9% estimated previously.
From a technical perspective, the overnight breakout through the 61.8% Fibonacci retracement level of the July-October downfall was seen as a fresh trigger for bulls and validated the positive outlook for the EUR/USD pair. That said, the Relative Strength Index (RSI) on the daily chart is flashing slightly overstretched conditions and makes it prudent to wait for some near-term consolidation or a modest pullback before positioning for any further appreciating move.
That said, any meaningful slide is likely to find some support near the 61.8% Fibo. resistance breakpoint, around the 1.0960 area. This is followed by the weekly trough, around the 1.0925 region, and the 1.0900 mark, below which the EUR/USD pair could drop further towards the 50% Fibo. level, around the 1.0860 region. Some follow-through selling might expose the 1.0770-1.0765 confluence, comprising the 100-day Simple Moving Average (SMA) and the 38.2% Fibo. level.
On the flip side, the multi-month peak, around the 1.1015 region, now seems to act as an immediate hurdle. Some follow-through buying should allow the EUR/USD pair to test the August monthly swing high, around the 1.1065 area. The momentum could get extended towards reclaiming the 1.1100 round figure, above which spot prices could appreciate further to the next relevant hurdle near the 1.1150 region (July 27 swing high).
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