EUR/USD steadies at lower levels with markets positioning for the Fed

The Euro is testing support at the 1.1960 area, trading at 1.1980 ahead of Wednesday's US session opening, after pulling back from over four-year highs at 1.2082 reached on Tuesday. Investors are reluctant to take excessive risks, awaiting the Federal Reserve's (Fed) monetary policy decision, due later on the day.

Earlier on Wednesday, ECB board member Martin Kocher put a lid on the Euro rally, opening the doors to a further interest rate cut in July if the common currency's appreciation starts to undermine the bank's inflation projections. Eurozone money markets have boosted the odds of a July rate cut to 25% from around 15% on Tuesday, according to data released by Reuters.

Previously, the pair had rallied about 1.24% after Trump said in a visit to Iowa on Tuesday that the current US Dollar value "is great" and that the currency has not fallen too low yet, which provided investors with fresh reasons to sell the Greenback.

The focus on Wednesday shifts to the Federal Reserve (Fed), which is widely expected to leave interest rates unchanged, although investors’ attention is likely to be on the bank’s autonomy. The US president’s plans to replace Jerome Powell with a more dovish Fed chairman, the efforts to oust Fed Governor Lisa Cook, and the criminal investigation have put the independence of the central bank into question.

Daily Digest market Movers: Dovish ECB comments undermine the Euro's rally

• ECB official Martin Kocher has brought interest rate cuts back to the table, undermining the Euro's strength. The US Dollar, however, is not out of the woods yet. The combination of Trump’s erratic trade policies, higher government spending, and his will to influence the Fed's monetary policy is eroding the status of the US Dollar as a reserve currency.
• Apart from that, markets remain wary about a potential US-Japan coordinated intervention to support the Japanese Yen. News of rate checks by the Fed and the Bank of Japan (BoJ) on Friday acted as the strongest intervention warning so far this year and prompted speculative investors to scale down their USD/JPY long positions.
• US macroeconomic data failed to support the Greenback on Tuesday. The Conference Board's Consumer Confidence index fell by 9.7 points to 84.5 in January, its lowest level in more than 11 years, from an upwardly revised 94.2 in December, weighed by increased concerns about the labour market and the rising prices.
• The US ADP Employment Change 4-week average endorsed those views, as net jobs decreased for the third consecutive week, to an average of 7,750 jobs per week, from 8,000 the previous week.
• In the economic calendar on Wednesday, the highlight is the outcome of the Fed's monetary policy meeting. The bank is widely expected to leave rates at the current 3.50%-3.75% range and hint at steady rates for the foreseeable future. The questions about the bank's independence and the replacement of Chairman Powell, whose term ends in May, are likely to grab investors' attention.

Technical Analysis: EUR/USD looks ripe for a correction

The EUR/USD pair has found resistance at the 251.8% Fibonacci extension of the January 16-20 uptrend, in the 1.2080 area. This is a common exhaustion level, which, together with the oversold momentum indicators, points to a potential correction, or at least some consolidation. Downside attempts, however, remain contained above the 1.1980 so far.

Technical indicators show an overstretched rally. The Moving Average Convergence Divergence (MACD) line keeps trending higher on the 4-hour chart, but the Relative Strength Index (RSI) is well above 70, levels that might cap further advances.

A confirmation below 1.1980 brings the January 26 high at 1.1907 into focus. On the upside, above Tuesday's high at 1.2082, there is no clear resistance until the 2021 peak, in the 1.2165 area.

(The technical analysis of this story was written with the help of an AI tool.)