EUR/USD retests multi-month peak as Fed rate cut bets continue to undermine the USD

• EUR/USD scales higher for the fourth successive day and retests its highest level since August 11.
• Dovish Fed expectations drag the USD to a near three-month low and lend support to the major.
• Traders now look to the German GfK Consumer Climate and the US Consumer Confidence Index.
• The focus will remain glued to the Eurozone consumer inflation figures and the US PCE Price Index.

The EUR/USD pair trades with a positive bias for the fourth straight day and climbs back closer to its highest level since August 11 during the Asian session on Tuesday. Spot prices currently hover around the 1.0960 area and seem poised to prolong the recent well-established uptrend in the wake of the prevalent US Dollar (USD) selling bias.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, drops to a near three-month low and continues to be weighed down by growing acceptance that the Federal Reserve (Fed) is done with its policy tightening campaign. Adding to this, the increasing likelihood of earlier rate cuts by the Fed in 2024 compared to the European Central Bank (ECB) turns out to be another factor acting as a tailwind for the EUR/USD pair.

The current market pricing indicates that the US central bank may begin easing policy as early as March 2024. In contrast, ECB President Christine Lagarde reiterated on Monday that the fight to contain price growth is not yet done, forcing investors to scale back their expectations that the next move by the central bank is set to be a rate cut. This, in turn, validates the positive outlook for the EUR/USD pair and supports prospects for a further appreciating move.

Market participants now look to the release of the German GfK Consumer Climate for some impetus ahead of the Conference Board's US Consumer Confidence Index. Apart from this, speeches by a slew of influential FOMC members will influence the USD price dynamics and provide some impetus to the EUR/USD pair. The aforementioned fundamental backdrop, meanwhile, suggests that the path of least resistance for spot prices remains to the upside.

Bullish traders, however, might refrain from placing aggressive bets ahead of this week's release of the key inflation data from the Eurozone and the US. The preliminary German and Spanish consumer inflation figures are due for release on Wednesday. This will be followed by the flash Eurozone CPI report on Thursday and the US Core PCE Price Index – the Fed's preferred inflation gauge – on Thursday, which, in turn, will drive the EUR/USD pair in the near term.

Technical levels to watch