Ella 
On Tuesday, EUR/USD rose for the second consecutive day, but lacked follow-up and was still limited to the previous day’s larger range of shocks. EUR/USD held steady above the mid-1.0900 level during the Asian session, finding support from dollar weakness.
The U.S. dollar index (DXY), which tracks the greenback against a basket of currencies, fell further from a nearly three-week high hit on Friday on expectations that the Federal Reserve (FED) is about to change its policy stance. A report from the New York Federal Reserve on Monday showed that U.S. consumers’ expectations for short-term inflation fell to their lowest level in nearly three years in December, boosting market bets. This, coupled with the maintenance of bullish sentiment in Asian stock markets, is seen as weighing on the status of safe-haven currencies and constitutes a “tailwind” for EUR/USD.
On the other hand, expectations that the European Central Bank (ECB) will maintain interest rates at record highs for a period of time also increased inflation expectations in the euro zone last month, thus boosting the euro. In addition, European Central Bank official Boris Vujcic said on Monday that the central bank does not expect to cut interest rates before the summer and expects euro zone inflation to gradually decline. Nonetheless, markets have priced in a 25 basis point (bps) rate cut by the European Central Bank by April, which is therefore again bearish for the EUR/USD pair.
In addition, the U.S. monthly employment report released last Friday showed that the labor market is still dynamic, providing more space for the Federal Reserve to maintain higher interest rates for a longer period of time. In addition, the recent speeches of several Federal Reserve officials have been less dovish, forcing investors to lower their expectations that the Federal Reserve will implement more aggressive easing policies and cut interest rates early, which is still supportive of higher U.S. bond yields. The fact that the 10-year U.S. Treasury yield is holding steady above 4.0% should limit any significant downside for the dollar.
Given the mixed fundamentals, it would be prudent to wait for strong follow-through buying before positioning for any further appreciation in EUR/USD. Traders are now looking to releases on German industrial production, France’s trade balance and the euro zone’s unemployment rate for some impetus. Later in the U.S. session, a speech by Governor Michael Barr may bring short-term opportunities, although investors may prefer to wait for the latest U.S. consumer inflation data on Thursday.
