EUR/USD consolidates around 1.0840 after subdued Eurozone growth data

• EUR/USD pares losses despite subdued Eurozone, and German GDP growth.
• The Euro faces a challenge in anticipation of ECB rate cuts ahead.
• Eurozone GDP YoY and QoQ showed readings of 0.1% and 0.0%, respectively, in Q4, while the German economy contracted.

The EUR/USD pair retraces its recent gains, edging higher to near 1.0840 during the European trading hours on Tuesday. Still, the Euro has recovered its intraday losses after Eurozone GDP data signaled that the bloc’s economy stagnated in the fourth quarter, better than the mild contraction expected. However, the heightened tension in the Middle East bolsters the US Dollar (USD) and consequently exerts downward pressure on the EUR/USD pair. Anticipation is growing that the United States (US) President Joe Biden’s administration may approve military strikes in response to a recent drone attack on a US outpost in Jordan. This attack resulted in the tragic loss of three US troops and inflicted injuries on at least 24 others.

The Euro (EUR) encounters a challenge due to increasing market expectations of interest rate cuts by the European Central Bank (ECB). There is prevailing anticipation among market participants of a 50 basis points (bps) reduction by June and a more significant 140 bps cut by December. However, on Monday, ECB Vice President Luis de Guindos suggested that the ECB would consider interest rate cuts only when there is confidence that inflation aligns with the central bank's 2.0% goal.

Eurozone seasonally adjusted Gross Domestic Product (GDP) increased by 0.1% YoY in the fourth quarter from the flat 0.0% prior. GDP (QoQ) was unchanged against the expected 0.1% decline. Germany’s preliminary Gross Domestic Product year-over-year contracted by 0.2% in the fourth quarter as expected, against a 0.4% decline prior. GDP (QoQ) decreased by 0.3%, as expected, from the previous figure of a 0.1% fall.

The US Dollar, measured by the US Dollar Index (DXY), may encounter challenges due to the falling US Treasury yields. The release of an enhanced US balance sheet has contributed to the support of prices for US Treasury bonds, undermining the Greenback. This could limit the losses of the EUR/USD pair.

The decrease in US yields seen since October has played a part in reinforcing the sustainability of the US Treasury. Furthermore, the robust economic growth has led to an improvement in tax receipts. The US Treasury Department has recently announced plans to borrow $760 billion in the first quarter, a reduction from the initial estimate of $816 billion in October.

Traders will carefully watch the releases of the US Housing Price Index and Consumer Confidence figures on Tuesday, aiming to gain further insights into the market landscape. The JOLTS job openings figures will also be closely watched. This scrutiny is particularly heightened in anticipation of the scheduled Federal Reserve (Fed) interest rate decision on Wednesday.

Daily digest market movers: EUR/USD loses ground on risk aversion sentiment

• Eurozone Economic Sentiment Indicator came in at 96.2 as expected in January from 96.3 prior.
• European Commission released Business Climate for January, declining by 0.4% against the 0.5% decline in December.
• European Commission Consumer Confidence was unchanged at the reading of -16.1 as expected in January.
• German Gross Domestic Product w.d.a improved to the reading of -0.4% YoY in Q4, from the previous 0.7% decline.
• European Central Bank (ECB) Governing Council member Boris Vujcic stated that it would not have a significant impact on the outcome whether the ECB begins lowering rates in April or June.
• Eurozone Economic sentiment, a broad measure of confidence, fell slightly to 96.2 in January from 96.3 a month earlier. Sentiment among services firms improved, while it deteriorated among manufacturers.
• The Eurozone economy stagnated in the fourth quarter compared with the preceding three-month period. Among the bloc’s main economies, growth in Spain and Italy was significant, while France stagnated and the German economy contracted.
• ECB policymaker Mario Centeno has expressed the view that the ECB should commence rate cuts sooner rather than later, advocating for a gradual approach rather than abrupt moves.
• ECB Governing Council member Peter Kazimir mentioned that a rate cut in June is more likely possible than in April.

Technical Analysis: EUR/USD consolidates after trimming intraday gains

EUR/USD holds steady around 1.0840 on Tuesday after paring back its intraday gains. The critical level at 1.0850 is seen as immediate resistance for the EUR/USD pair. A successful breach above this level might potentially propel the pair towards the 23.6% Fibonacci retracement level at 1.0874, in conjunction with the 14-day Exponential Moving Average (EMA) at 1.0876. Further advancement could see the EUR/USD exploring the region near the psychological barrier at the 1.0900 level.

On the downside, the pair may encounter immediate support at the psychological level of 1.0800, aligning with the monthly low at 1.0795. A decisive break below this monthly low could reinforce bearish sentiment, potentially leading the EUR/USD pair towards the region around the major support at the 1.0750 level.

EUR/USD: Daily Chart