Daily Price Outlook
EUR/USD continues to face selling pressure above 1.0490 in Wednesday’s European session. However, the currency pair is falling due to a strong recovery in the US Dollar (USD).
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rebounded sharply to near 106.50 after dipping to an 11-week low of 106.10 earlier in the day.
US Dollar Gains on Rising Treasury Yields and PCE Inflation Data
On the US front, the broad-based US dollar recovered due to the strong recovery in US bond yields, which had been declining for almost a month. The 10-year US Treasury yields surged to near 4.33% after hitting a fresh 13-week low of around 4.28% earlier in the day.
The House approved Donald Trump's $4.5 trillion tax cut plan, causing traders to sell US government bonds. They expect lower taxes to boost spending, leading to higher inflation.
This could force the Federal Reserve to keep interest rates high for longer, strengthening the US dollar and putting pressure on the EUR/USD pair.
Investors await the US Personal Consumption Expenditures Price Index (PCE) data for January, scheduled for release on Friday, to gain fresh insights into inflation trends.
Meanwhile, the core PCE inflation data, the Fed’s preferred measure as it excludes volatile food and energy prices, is estimated to have slowed to 2.6% year-over-year from 2.8% in December. Softer inflation data could weigh on expectations that the Fed will delay rate cuts.
Euro Struggles Amid ECB Policy Outlook
On the other hand, the EUR/USD is under pressure as investors favor the US Dollar over the Euro (EUR). However, the shared currency is outperforming as traders shift focus to the upcoming European Central Bank (ECB) policy meeting next week.
It should be noted that the ECB is widely expected to cut its Deposit Facility rate by 25 basis points (bps) to 2.5%. Investors will closely monitor the ECB’s monetary policy guidance.
Several ECB officials have indicated that the central bank should continue reducing interest rates, given expectations that inflation will sustainably return to the 2% target.
Moreover, the Soft Eurozone Q4 Negotiated Wage Rate data, a key wage growth measure, has reinforced expectations of ECB rate cuts. On Tuesday, the ECB reported that the wage growth measure increased at a slower pace of 4.12%, compared to a 5.43% rise in the previous quarter.
However, ECB board member Isabel Schnabel criticized dovish bets, arguing that Eurozone economic weakness is “not due to overly high borrowing costs” but rather to “structural factors.” She suggested that the current 2.75% rate may no longer be restrictive for the eurozone economy.
Looking ahead, investors will monitor the German flash Harmonized Index of Consumer Prices (HICP) data for February, set for release on Friday, for further cues on inflation and ECB policy direction.
EUR/USD – Technical Analysis
EUR/USD is trading at $1.04972, down 0.01%, reflecting cautious sentiment as it hovers just above the pivot point at $1.04780. The pair is trading above the 50 EMA at $1.04709, signaling short-term bullish momentum.
If the price holds above this pivot, the next target is immediate resistance at $1.05290. A break above this level could push prices towards $1.05673, with a more ambitious move towards $1.06076 if buying pressure continues.
On the downside, if EUR/USD breaks below the pivot at $1.04780, it would shift sentiment to bearish, targeting immediate support at $1.04505.
A further decline could see the pair testing $1.04075, with a deeper drop towards $1.03556 if selling intensifies. The 50 EMA at $1.04709 acts as dynamic support, and a break below this level would confirm a bearish reversal.
The technical outlook suggests a cautious buy above the pivot at $1.04785, targeting $1.05475 with a stop loss at $1.04402.
This setup aligns with the short-term bullish bias while maintaining a favorable risk-reward ratio. Traders should watch for volume confirmation and price action around the $1.05290 resistance to validate the bullish momentum.
Conversely, a break below $1.04780 would invalidate the bullish setup and shift sentiment to bearish, likely driving prices towards $1.04505 and beyond.
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