Euro loses ground as US Dollar appreciates in risk-averse trading

• The Euro extends its reversal as the safe-haven US Dollar appreciates.
• Cooling hopes of interest rate cuts and growing geopolitical risks have crushed investors’ appetite for risk.
• ECB policymakers and German CPI figures push back monetary easing expectations.

The Euro (EUR) is under increasing bearish pressure on Tuesday. The risk-averse sentiment – with investors paring back hopes of rate cuts in 2024 – and the explosive situation in the Middle East, are rushing traders into safe assets and weighing on the common currency.

The hawkish comment from the European Central Bank (ECB) Governor François Villeroy de Galhau, playing down rate cut expectations, has failed to provide any significant support to the Euro.

Villeroy’s observations come after the President of the Bundesbank, Joachim Nagel warned about the mistake of easing monetary policy too early. These comments have forced investors to reassess their expectations of aggressive rate cuts by most major central banks. This is weighing on risk appetite and underpinning support for the US Dollar.

Furthermore, the Houthi militias have extended their targets to UK and US cargo vessels. This forces shipping companies to find alternative routes, boosting transport costs, which will translate into higher inflation. A further challenge for the central banks’ easing plans.

Daily digest market movers: Euro depreciates in risk-off markets

• The Euro is trading lower, weighed by USD strength, although it remains within the last two weeks’ trading range.
   
• On Tuesday, ECB’s Villeroy affirmed that it is still too early to declare victory on inflation, cooling hopes for imminent rate cuts.
   
• On Monday, Joachim Nagel, also a member of the ECB Board of Governors, warned about the dangers of cutting rates too early.
   
• The final estimate of the German Consumer Prices Index (CPI) for December confirmed that prices grew by 3.7% on year. This marks an uptick from the 3.2% increase seen in November and provides further evidence that bringing inflation to 2% will take an additional effort.
   
• Later today, the US Federal Reserve Bank of New York Empire State Manufacturing Index and the Fed’s Governor Christopher Waller’s comments are likely to increase US Dollar’s volatility.
   
• The highlight on the US Calendar this week are Wednesday’s Retail Sales figures, which are expected to have increased moderately in December.
   
• US consumption data will provide context to the speeches of Fed’s policymakers Michael Barr and Michelle Bowman.
   
• In the Eurozone calendar on Wednesday, Eurostat is expected to confirm that the CPI accelerated to 2.9% year-on-year in December from 2.4% in November, while the Core inflation eased to a 3.4% yearly pace from the previous 3.6% rate.

Technical Analysis: EUR/USD approaches recent range bottom at 1.0875

The EUR/USD has pierced the trendline support from early November lows at 1.0910, and is approaching a key support area at 1.0875, which contained bears in early January and mid-December.

A clear move below here would activate a head and shoulders (H&S) pattern, a common trend-change figure, and increase bearish pressure towards 1.0730. The measured target of the H&S pattern is the 78.6% Fibonacci retracement of the late 2023 rally.

On the upside, the reverse trend line at 1.0910 is likely to offer resistance ahead of the 1.1000 area.