EUR/USD consolidates in a range just below 1.0700, eyes Euro Zone CPI for some impetus

The EUR/USD pair struggles to capitalize on its recent recovery gains registered over the past two days and oscillates in a narrow band during the Asian session on Tuesday. Spot prices currently trade just below the 1.0700 round-figure mark and remain well within the striking distance of a six-month low touched in the aftermath of the dovish European Central Bank (ECB) rate decision last Thursday.

The ECB opted to hike rates for the 10th straight time, by 25 bps, taking its main rate to an all-time high level of 4% to counter stubbornly high inflation. In the accompanying monetary policy statement, the central bank, however, sent a clear message that the 14-month-long policy tightening cycle could have reached its peak already. Furthermore, the downgrading of CPI and GDP growth forecasts for the coming years – 2024 and 2025 – reaffirmed expectations that further hikes may be off the table for now. This, in turn, is seen acting as a headwind for the shared currency, though a softer tone surrounding the US Dollar (USD) continues to lend some support to the EUR/USD pair.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, remains depressed below its highest level since March set last week as traders seem reluctant to place fresh bullish bets ahead of the key central bank event risk. The Federal Reserve (Fed) is scheduled to announce the outcome of the highly-anticipated two-day monetary policy meeting on Wednesday and is widely expected to stand path. That said, the markets are still pricing in the possibility of one more 25 bps lift-off by the end of this year. The bets were lifted by resilient US macro data released recently and still-sticky inflation, which should allow the Fed to keep interest rates higher for longer.

Hence, investors will keep a close eye on the so-called ‘dot plot’ and inflation expectations. Apart from this, Fed Chair Jerome Powell's remarks at the post-meeting press conference will be scrutinized closely for fresh cues about the future rate-hike path. This, in turn, will play a key role in influencing the near-term USD price dynamics and help determine the next leg of a directional move for the EUR/USD pair. Heading into the key central bank event risk, the final Euro Zone CPI print might provide some impetus ahead of the US housing market data – Building Permits and Housing Starts. The aforementioned fundamental backdrop, meanwhile, seems tilted in favour of bullish traders.

Hence, any subsequent move up might still be seen as a selling opportunity and runs the risk of fizzling out rather quickly. Bearish traders, however, might wait for weakness below the 1.0635-1.0630 region before positioning for an extension of a two-month-old downtrend from the 1.1275 zone, or a 17-month top touched in July. The EUR/USD pair might then turn vulnerable to accelerate the fall towards challenging the YTD low, around the 1.0480 area set in January.

Technical levels to watch