EUR/USD weakens below mid-1.0400s amid notable USD demand

The EUR/USD pair extends the overnight modest pullback from the 1.0530-1.0535 region, or its highest level since December 17 and attracts heavy follow-through selling during the Asian session on Tuesday. Spot prices currently trade around the 1.0430 area, down over 0.50% for the day and seem vulnerable to weaken further amid a strong pickup in the US Dollar (USD) demand.

Investors remain concerned that US President Donald Trump's trade tariffs would reignite inflationary concerns, triggering a modest recovery in the US Treasury bond yields. This, in turn, assists the USD Index (DXY), which tracks the Greenback against a basket of currencies, to stage a solid bounce from over a one-month low touched on Monday and exerts downward pressure on the EUR/USD pair. 

Meanwhile, Trump earlier this month had threatened to impose tariffs on Mexico, Canada, China and the European Union (EU). This, along with rising bets for a supersized rate cut by the European Central Bank (ECB) on Thursday, undermines the shared currency and contributes to the EUR/USD pair's decline. Bears, however, might refrain from placing aggressive bets ahead of the key central bank event risks.

The US Federal Reserve (Fed) is scheduled to announce its policy decision at the end of a two-day meeting on Wednesday, which will be followed by the ECB meeting on Thursday. The latest monetary policy updates should provide a fresh directional impetus to the EUR/USD pair. In the meantime, traders on Tuesday will take cues from the US macro data to grab short-term opportunities later during the US session.

The US economic docket features the release of Durable Goods Orders, the Conference Board’s Consumer Confidence Index and the Richmond Manufacturing Index. Nevertheless, the aforementioned fundamental backdrop makes it prudent to wait for strong follow-through selling before confirming that the EUR/USD pair’s recent recovery from over a two-year trough has run its course.