- EUR/USD trades with a mild negative bias on Tuesday, though the downside seems limited.
- Reduced bets for a March Fed rate cut underpin the USD and act as a headwind for the pair.
- The uncertainty over the timing of a rate cut by the ECB holds traders from placing fresh bets.
The EUR/USD pair struggles to gain any meaningful traction during the Asian session on Tuesday and oscillates in a narrow trading band below the 1.0900 round-figure mark. Traders seem reluctant to place aggressive directional bets and prefer to wait on the sidelines amid the uncertainty over the timing of a potential interest rate cut by the European Central Bank (ECB).
The first ECB policy rate cut is projected to take place in April and the markets have been pricing in a total reduction of 135 basis points (bps) by the end of 2024. That said, ECB President Christine Lagarde signalled last week that borrowing costs will likely start coming down only in the summer and if the incoming economic data supports such a move. Hence, the market focus will remain glued to the ECB monetary policy meeting on Thursday, which will play a key role in influencing the shared currency and provide some meaningful impetus to the EUR/USD pair.
In the meantime, diminishing odds for an early interest rate cut by the Federal Reserve (Fed) continue to act as a tailwind for the US Dollar (USD) and act as a headwind for the EUR/USD pair. In fact, investors have been scaling back their expectations for a more aggressive policy easing in 2024 in the wake of a still-resilient US economy and the recent hawkish remarks by a slew of Fed policymakers. This remains supportive of elevated US Treasury bond yields, which, along with a further escalation of geopolitical tensions in the Middle East, underpin the safe-haven buck.
The USD bulls, however, seem reluctant to place aggressive bets in the wake of the prevalent risk-on environment. This, along with the mixed fundamental backdrop, should help limit the downside for the EUR/USD pair ahead of this week's key central bank event risk and important macro data. The flash PMI prints from the Eurozone and the US are due for release on Wednesday. This will be followed by the Advance US Q4 GDP report on Thursday and the US Core PCE Price Index, or the Fed's preferred inflation gauge on Friday, which should infuse volatility in the markets.
Technical levels to watch
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EUR/USD treads water just above 1.0400 post-US data
Another sign of the good health of the US economy came in response to firm flash US Manufacturing and Services PMIs, which in turn reinforced further the already strong performance of the US Dollar, relegating EUR/USD to the 1.0400 neighbourhood on Friday.
GBP/USD remains depressed near 1.2520 on stronger Dollar
Poor results from the UK docket kept the British pound on the back foot on Thursday, hovering around the low-1.2500s in a context of generalized weakness in the risk-linked galaxy vs. another outstanding day in the Greenback.
Gold keeps the bid bias unchanged near $2,700
Persistent safe haven demand continues to prop up the march north in Gold prices so far on Friday, hitting new two-week tops past the key $2,700 mark per troy ounce despite extra strength in the Greenback and mixed US yields.
Geopolitics back on the radar
Rising tensions between Russia and Ukraine caused renewed unease in the markets this week. Putin signed an amendment to Russian nuclear doctrine, which allows Russia to use nuclear weapons for retaliating against strikes carried out with conventional weapons.
Eurozone PMI sounds the alarm about growth once more
The composite PMI dropped from 50 to 48.1, once more stressing growth concerns for the eurozone. Hard data has actually come in better than expected recently – so ahead of the December meeting, the ECB has to figure out whether this is the PMI crying wolf or whether it should take this signal seriously. We think it’s the latter.
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