The EUR/USD pair showed positive traction during the Asian session on Thursday, rebounding from a three-day losing streak that took the pair to its lowest level since early July, around the 1.0760 mark. By mid-session, the pair edged closer to the 1.0800 mark, buoyed by a modest decline in the US Dollar (USD). However, caution lingers for bullish traders due to the prevailing fundamental backdrop.
A retreat in US Treasury bond yields from a three-month high has triggered some USD profit-taking after its strong rally to late July levels. Nevertheless, the expectation that the Federal Reserve (Fed) will proceed with only modest rate cuts, coupled with investor anxiety ahead of the November 5 US Presidential election, continues to lend support to the safe-haven Greenback.
On the European side, dovish expectations surrounding the European Central Bank (ECB) are likely to limit any significant upward movement for the EUR/USD pair. The Eurozone’s annual inflation rate dropped to 1.7% in September, falling below the ECB’s 2% target for the first time since June 2021. This reinforces the ECB’s view that the disinflationary trend is progressing, increasing the likelihood of further policy easing.
Adding to this, ECB officials, including Mario Centeno, have expressed concerns over downside risks to both growth and inflation, with Centeno indicating that a 50 basis points (bps) rate cut in December is being considered. Similarly, ECB’s Bostjan Vasle noted that recent data points to potential risks that could delay economic improvement, which could further hinder a robust Euro recovery.
As a result, traders remain cautious about making aggressive bullish bets on the Euro. Investors are now turning their attention to the upcoming flash PMI data from both the Eurozone and the US for insights into global economic health, while movements in US bond yields are expected to influence the USD’s direction.
In summary, while the EUR/USD has shown signs of recovery, the broader fundamentals point to a downside bias for the pair, with any significant upward momentum likely to be capped.
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