The EUR/USD pair struggled to find significant momentum on Tuesday, trading within a narrow range just above the 1.0900 level during the Asian session.
The US Dollar (USD) continued to gain strength, building on its recent rebound from a one-month low reached last Friday. The dollar’s upward movement for the third consecutive day acted as a headwind for the EUR/USD pair.
Although the Federal Reserve (Fed) decided not to raise interest rates last week, their signal that borrowing costs may still need to rise by up to 50 basis points by year-end prompted market expectations of another 25-basis-point increase at the July FOMC meeting. This resulted in higher US bond yields and provided support for the US dollar.
Furthermore, the USD benefited from its safe-haven status due to a generally weaker tone in equity markets. Concerns about a potential global economic downturn, particularly in China, overshadowed reports of China’s consideration of a broad stimulus package to bolster economic support. Despite the People’s Bank of China’s decision to cut one-year and five-year Loan Prime Rates (LPRs) on Tuesday, it failed to alleviate concerns or generate significant momentum for the EUR/USD pair.
However, the downside for the EUR/USD pair appears to be somewhat cushioned at present, thanks to the European Central Bank’s (ECB) hawkish stance. Last week, the ECB raised interest rates for the eighth consecutive time, reaching the highest level in 22 years. They also indicated the need for additional rate hikes to achieve the medium-term inflation target of 2% in the Eurozone. The inflation projection for this year was revised upward to 5.1% from 4.6%, suggesting that the ECB is not finished with its tightening policy. This positive outlook may offer support to the euro.
Traders exhibited reluctance to take aggressive positions, opting to wait on the sidelines ahead of Fed Chair Jerome Powell’s two-day congressional testimony beginning on Wednesday. Market participants will closely follow comments from influential members of the Federal Open Market Committee (FOMC) for indications regarding the future path of interest rates, which will play a crucial role in driving USD demand and determining the near-term direction of the EUR/USD pair. Additionally, investors will closely monitor the release of flash PMI data from the Eurozone and the US later this week, scheduled for Friday.
