EUR/USD surrenders modest intraday gains, downside potential seems limited

EUR/USD struggles to build on modest intraday gains to a multi-day top, despite a softer USD.
A fresh leg down in the US bond yields undermines the USD and lends support to the major.
The upside remains capped as traders now keenly await this week’s crucial inflation figures.

The EUR/USD pair retreats a few pips from a three-day top touched during the mid-European session on Tuesday and currently trades around the 1.0850 region. The downside, however, remains cushioned in the wake of diminishing odds for rapid rate cuts by the European Central Bank (ECB). Apart from this, a modest US Dollar (USD) downtick is seen as another factor acting as a tailwind for the currency pair.

That said, the darkening Eurozone economic outlook held back traders from positioning for any further gains for the shared currency. Moreover, growing acceptance that the Federal Reserve (Fed) will keep rates higher for longer helps limit losses for the USD and contributes to capping the EUR/USD pair. Investors also prefer to wait for this week’s releases of crucial inflation data from the Eurozone and the United States (US).

The flash CPI estimates from Germany, France and Spain are due for release on Thursday, which will be followed by the US Personal Consumption Expenditures (PCE) Price Index. Apart from this, Friday’s closely watched Eurozone inflation data will play a key role in influencing the shared currency and provide some meaningful impetus to the EUR/USD pair ahead of the upcoming ECB policy meeting on March 7.

Daily digest market movers: Lacks firm intraday direction amid mixed fundamental cues

The recent hawkish comments by European Central Bank (ECB) policymakers, suggesting that the central bank shouldn’t rush into a decision to cut interest rates, continue to underpin the shared currency.
ECB President Christine Lagarde told lawmakers that wage pressures remain strong across the region and are anticipated to be an increasingly important driver of inflation dynamics in the coming quarters.
Lagarde added that there are increasing signs of a bottoming-out in growth and some forward-looking indicators point to a pick-up later this year, pushing back market expectations for early interest rate cuts.
The yield on the benchmark 10-year US government bond remains depressed near 4.275%, which is seen undermining the US Dollar and lending additional support to the EUR/USD pair on Tuesday.
A looming recession risk in Germany – the Eurozone’s largest economy – keeps a lid on any further gains for the Euro amid expectations that inflation is moving back towards the ECB’s 2% annual target.
The FOMC meeting minutes released last week, along with several Federal Reserve officials, suggested that the US central bank will keep rates higher for longer amid sticky inflation and a resilient economy.
Traders now look to the US macro data – Durable Goods Orders, the Conference Board’s Consumer Confidence Index and the Richmond Manufacturing Index – for short-term opportunities on Tuesday.
The focus, however, remains glued to this week’s release of the closely-watched flash Eurozone consumer inflation figures and the US Personal Consumption Expenditures (PCE) Price Index.

On the flip side, the 200-day SMA resistance breakpoint, around the 1.0830-1.0825 region, now seems to protect the immediate downside ahead of the 1.0800 mark. The latter coincides with the 23.6% Fibo. level, which if broken decisively will negate the positive outlook and make the EUR/USD pair vulnerable to accelerate the fall towards the 1.0770-1.0765 area. Spot prices could eventually drop to retest sub-1.0700 levels, or a three-month low touched on February 14.

Technical analysis: EUR/USD bulls have the upper hand, 1.0800 mark holds the key

From a technical perspective, the overnight close above the 200-day Simple Moving Average (SMA) and the subsequent move up favours bullish traders. Moreover, oscillators on the daily chart have just started gaining positive traction, suggesting that the path of least resistance for the EUR/USD pair is to the upside. That said, it will still be prudent to wait for some follow-through buying beyond the 1.0865 region, or the 38.2% Fibonacci retracement level of the December-February downfall before positioning for any further gains. Spot prices might then surpass last week’s swing high, around the 1.0885-1.0895 region, and aim to test the 50% Fibo. level, around the 1.0920 zone. The momentum could extend further towards reclaiming the 1.1000 psychological mark for the first time since January 11.