EUR/USD Struggles to Find Footing as Fed Keeps Rate Cut Expectations in Check

EUR/USD Struggles to Find Footing as Fed Keeps Rate Cut Expectations in Check

The EUR/USD faced another setback, slipping into the 1.0900 handle on Wednesday due to cautious remarks from the Federal Reserve (Fed) regarding rate cuts. This development has provided a significant boost to the US Dollar (USD), which has remained strong amidst a broader market recovery. With an absence of European Union (EU) data on Wednesday, market participants are now turning their attention to the release of the US Purchasing Managers’ Index (PMI) figures.

The recently published minutes from the Fed’s December meeting revealed a central bank that is not as dovish as previously anticipated. Despite Chairman Jerome Powell’s unexpected pivot in the last rate statement, Fed officials suggested that interest rates may not decline as rapidly as the market expects. While rates may be near their peak, the main policy rate could potentially remain higher for longer. This revelation has dampened expectations for an aggressive rate cut cycle in 2024, causing the EUR/USD to slide further.

The Fed’s less dovish stance has provided investors with much to consider, especially those betting on a speedy pace of rate cuts. The comments from Fed officials, in conjunction with remarks from Richmond Fed President Thomas Barkin, have created uncertainty regarding future rate movements. This uncertainty may impact market sentiment and potentially influence trading decisions, particularly as the US Nonfarm Payrolls (NFP) report for December approaches.

Before the release of the US NFP data, Eurozone inflation figures are scheduled to be published. The Harmonized Index of Consumer Prices (HICP) for December is expected to show a slight rebound from 2.4% to 3.0%, reflecting the persistent inflationary pressures in Europe. These data points could impact the EUR/USD and further complicate its path to recovery.

Technical Analysis

The EUR/USD experienced a late-Wednesday rebound from the 1.0900 handle, bouncing back from a two-week low near 1.0893. However, the pair is currently struggling to gain bullish momentum needed for a significant recovery. Intraday action remains bearish, with the EUR/USD sliding below the 200-hour Simple Moving Average (SMA) near 1.1020 on Monday and struggling to regain the 1.1000 major handle. A further downside move is anticipated, with daily candles approaching the 200-day SMA near 1.0850. Additionally, the 50-day SMA is on track to confirm a bullish crossover of the longer moving average. The EUR/USD has already experienced a 2% decline from last week’s peak bids of 1.1195, and technical support is expected to be tested around the 1.0750 level, representing the last swing low.

The EUR/USD continues to face challenges as the Fed’s cautious approach to rate cuts restrains the pair’s upward momentum. Despite market expectations for a faster pace of rate cuts, the Fed has suggested that interest rates may remain higher for longer. This revelation has dampened market sentiment and created uncertainty among investors, impacting the EUR/USD. In addition, upcoming economic data, including Eurozone inflation figures and the US NFP report, are likely to shape the short-term direction of the pair. From a technical perspective, the EUR/USD is struggling to find support and faces further downside pressure. Overall, the EUR/USD remains in a precarious position as it seeks a foothold amidst changing market dynamics.

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