EUR/USD extends losses towards two-month low as ECB rate cut bets persist

• EUR/USD turns lower for the third straight day and seems vulnerable to slide further.
• Expectations that the ECB will start cutting rates in April continue to undermine the Euro.
• Hopes of higher for longer Fed rates favour the USD bulls and validate the negative bias.

The EUR/USD pair attracts fresh sellers following an intraday uptick to the 1.0765 region and drops back closer to a two-month low during the European session on Tuesday. The initial market reaction to an unexpected jump in Germany’s Factory Orders fades rather quickly in the wake of expectations that the European Central Bank (ECB) could start cutting interest rates by April amid falling inflation in the Eurozone. This acts as a headwind for the shared currency, which, along with the underlying bullish tone around the US Dollar (USD), contributes to capping the upside for the currency pair.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, holds firm near its highest level since November 14 as markets seem to have fully priced out early rate cuts by the Federal Reserve (Fed). Recent US macro data suggested that the economy remains in good shape, giving the Fed the headroom to keep rates higher for longer. Apart from this, geopolitical tensions and worries about slowing economic growth in China – the world's second-largest economy – should benefit the safe-haven buck, suggesting that the path of least resistance for the EUR/USD pair is to the downside.

Daily digest market movers: ECB rate cut bets, hawkish Fed expectations weigh

• European Central Bank (ECB) policymaker Pablo Hernandez de Cos said on Tuesday that the next move will be cutting interest rates amid growing confidence that inflation is coming back to the 2% target.
• Germany’s Factory Orders rose by a sharp 8.9% in December on month as against the forecasts for no growth, albeit does little to provide any impetus to the shared currency and lend any support to the EUR/USD pair.
• The ECB's monthly Survey, released earlier today, showed that inflation expectations among Eurozone consumers for the next year fell from 3.5% in November to 3.2% in December.
• Data released by Eurostat showed that Retail Sales in the Eurozone declined by the 0.8% YoY in December as compared to a 0.4% drop in November and consensus estimates for a 0.9% fall.
• The Institute for Supply Management (ISM) reported on Monday that the US services sector growth picked up pace in January, with its Non-Manufacturing PMI rising to 53.4 from 50.5 in December.
• This, along with Friday's blockbuster NFP report and the recent hawkish comments by Federal Reserve officials, forced investors to further scale back expectations for aggressive policy easing in 2024.
• The CME Group's Fedwatch tool indicates that traders have almost entirely priced out the possibility of a March rate cut and now see just five cuts by the end of this year compared with six previously.
• Expectations that the Fed will keep interest rates higher for longer assist the US Dollar to stand tall near its highest level since November 14 and support prospects for a further downside for the EUR/USD pair.

Technical Analysis: EUR/USD bears might wait for break below 1.0700 before placing fresh bets

From a technical perspective, the recent breakdown below the 100-day Simple Moving Average (SMA) and the emergence of fresh selling on Tuesday favour bearish traders. Moreover, oscillators on the daily chart are holding deep in the negative territory and are still away from flashing oversold conditions, suggesting that the path of least resistance for the EUR/USD pair is to the downside. Some follow-through selling below the 1.0700 mark will reaffirm the bearish outlook and drag spot prices further towards the 1.0665-1.0660 intermediate support en route to the 1.0620-1.0615 region and the 1.0600 round figure.

On the flip side, the daily swing high around the 1.0760-1.0765 region seems to act as an immediate hurdle ahead of the 1.0800 mark and the 200-day SMA, currently pegged near the 1.0835-1.0840 zone. That said, a sustained strength beyond the latter might trigger a short-covering rally and allow the EUR/USD pair to reclaim the 1.0900 round figure. Some follow-through buying will negate the negative outlook and shift the near-term bias in favour of bullish traders.