EUR/USD languishes near YTD low, just above mid-1.0400s on bullish USD

• EUR/USD refreshes YTD low on Tuesday and is pressured by a combination of factors.
• Bets that further ECB rate hikes may be off the table continue to undermine the Euro.
• The Fed’s hawkish outlook pushes the USD to an 11-month top and contributes to the fall.

The EUR/USD pair now seems to have entered a bearish consolidation phase and is seen oscillating in a narrow trading band, around the 1.0465 area, or a fresh YTD low touched during the Asian session this Tuesday.

The shared currency is undermined by signs of the beginning of the end of the high inflation in the Eurozone and weakness in Germany – the economic engine of Europe. Eurozone's largest economy. This, in turn, has been fueling speculations that additional rate hikes by the European Central Bank (ECB) may be off the table for now. The markets are not betting that the ECB's next move is likely to be a rate cut. Apart from this, the underlying strong bullish sentiment surrounding the US Dollar (USD) continues to weigh on the EUR/USD pair.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, climbs to its highest level since November 2022 and continues to draw support from the Federal Reserve’s (Fed) higher-for-longer interest rate narrative. The hawkish outlook was reinforced by Cleveland Fed President Loretta Mester, saying that the US central bank will likely need to hike rates one more time this year. Mester added that the Fed will keep rates restrictive to get inflation down and higher rates are needed to make sure the disinflation process continues.

This remains supportive of a further rise in the US Treasury bond yields, which, along with a generally weaker risk tone, is seen benefitting the safe-haven USD and acting as a headwind for the EUR/USD pair. That said, the Relative Strength Index (RSI) on the daily chart is flashing oversold conditions and might hold back traders from placing fresh bearish bets around the major. Hence, it will be prudent to wait for some near-term consolidation or a modest recovery before traders start positioning for an extension of the recent well-established downtrend.

Nevertheless, the aforementioned fundamental backdrop suggests that the path of least resistance for the EUR/USD pair is to the downside and any meaningful bounce is more likely to get sold into. In the absence of any relevant market-moving macro data from the Eurozone and a bank holiday in Germany, the USD price dynamics will continue to play a key role in influencing the major. Later during the early North American session, traders will take cues from the release of the US JOLTS Job Openings for short-term opportunities.

Technical levels to watch