EUR/USD extends gains to near 1.0730 on improved risk appetite, US Retail Sales eyed

• EUR/USD continues to gain ground due to risk-on market sentiment.
• The Euro avoided to react on remarks from the ECB President Christine Lagarde.
• ECB's forward-looking wage tracker maintains its indication of robust wage pressures.
• FedWatch Tool suggests around 90% and 59% probability of rate adjustment in March and May.

The EUR/USD pair continues its upward momentum for the second consecutive session on Thursday, finding support from a weakened US Dollar (USD) amid softer US yields. This reflects a notable shift in market sentiment, with expectations leaning towards no interest rate adjustment by the Federal Reserve (Fed) in March and May.

The Euro (EUR) faced challenges following the release of the seasonally adjusted Eurozone Gross Domestic Product (GDP) data, which stayed unchanged as expected for the fourth quarter. Christine Lagarde, the President of the European Central Bank (ECB), stated that recent data indicates ongoing subdued economic activity in the near term.

The US Dollar Index (DXY) faces challenges due to the improved risk appetite of investors. According to the FedWatch Tool, the probability of the Fed keeping interest rates steady in March and May has surged to nearly 90% and 59%, respectively. However, there is a 53% probability of a rate cut in June.

Daily digest market movers: EUR/USD appreciates on subdued US Dollar

• The US Dollar Index hovers around 104.70 with the 2-year and 10-year US Treasury yields standing lower at 4.57% and 4.23%, respectively, by the press time.
• Chicago Fed President Austan Goolsbee sought to alleviate market concerns by suggesting that higher-than-anticipated consumer prices don't necessarily preclude the Federal Reserve from considering interest rate cuts in 2024.
• Federal Reserve Vice Chair for Supervision Michael Barr attracted attention by reaffirming the Fed and its core Federal Open Market Committee's confidence in the trajectory of US inflation toward the Fed's 2% target.
• US headline Consumer Price Index (CPI) rose by 3.1% in January, surpassing the expected 2.9% but below the previous rate of 3.4%.
• US Inflation increased by 0.3% MoM, against the expectation of maintaining the previous reading of 0.2%. US Core CPI (YoY) remained consistent at 3.9% against the market expectation of a decline to 3.7% in January.
• Christine Lagarde, the President of the European Central Bank (ECB), stated that recent data indicates ongoing subdued economic activity in the near term. While the current disinflationary trend is anticipated to persist, Lagarde emphasized the importance of ensuring confidence that this trajectory will ultimately lead to the sustainable achievement of the ECB's 2% inflation target.
• ECB Vice President Luis de Guindos highlighted persistent wage pressures at elevated levels, suggesting that there is insufficient data available to confirm a reduction in these pressures.
• The preliminary Eurozone Gross Domestic Product (GDP) seasonally adjusted remained unchanged at 0.1% year-over-year in the fourth quarter, aligning with market expectations.
• The Eurozone GDP seasonally adjusted quarter-over-quarter remained flat at 0.0%, consistent with the reading in the previous quarter.

Technical Analysis: EUR/USD extends gains to near 1.0730

EUR/USD trades near 1.0730 on Thursday followed by the immediate resistance at the major level of 1.0750, followed by the 50-4hr Exponential Moving Average (EMA) at 1.0761. If the pair manages to breach these levels, it could target the area around the 23.6% Fibonacci retracement level at 1.0799, coinciding with the psychological barrier at 1.0800.

On the downside, the psychological level of 1.0700 is seen as a crucial support, coinciding with the three-month low reached at 1.0694 on Wednesday. A sustained break below this level might lead the EUR/USD pair towards testing the major support at the 1.0650 level.

In technical analysis, the EUR/USD pair exhibits a 14-day Relative Strength Index (RSI) below the 50 mark, signaling a bearish momentum. However, the Moving Average Convergence Divergence (MACD), a lagging indicator, is positioned below the centerline but has crossed over the signal line upwards, indicating a potential shift in momentum. Traders may opt to await confirmation from the MACD regarding the directional trend.

EUR/USD: Four-Hour Chart