(Eren Sengezer – FXStreet)
– EUR/USD has gone into a consolidation phase following Monday’s sharp decline.
– Euro (EUR) is struggling to regain its traction as investors remain cautious.
– Comments from European Central Bank (ECB) officials highlight differences of opinion on next policy move.
– US Dollar (USD) could continue to outperform its rivals in case safe-haven flows return.
EUR/USD seems to have steadied at around 1.0250 early Tuesday after having suffered heavy losses on Monday but it could find it difficult to stage a rebound in the near term. The Euro (EUR) is struggling to attract buyers as investors assess the latest comments from European Central Bank (ECB) officials. On the other hand, the US Dollar (USD) holds its ground as the risk sentiment remains fragile. Meanwhile, the technical picture points to a bearish outlook for EUR/USD.
ECB uncertainty limits Euro’s gains
Investors are struggling to figure out the European Central Bank’s (ECB) next policy move and refraining from betting on further Euro (EUR) strength. ECB policymaker Klaas Knot said late last week that the pace of rate hikes was likely to slow as policy tightens further. Similarly, Chief Economist Philip Lane noted that the ECB could consider reducing the pace of rate increases at the December 15 policy meeting. “One platform for considering a very large hike, such as 75 basis points (bps), is no longer there,” Lane said.
On the other hand, ECB Governing Council member Rober Holzmann told the Financial times that he was not seeing any signs of core inflation softening and noted that he will back a 75 bps hike at the next meeting. On the same note, “we must resolutely raise our key rates further and adopt a restrictive stance,” Bundesbank President Joachim Nagel argued. “We cannot stop here. Further decisive steps are necessary.”
The difference of opinion among ECB policymakers doesn’t allow the Euro (EUR) to continue to gather strength against the US Dollar (USD), causing EUR/USD to stay vulnerable to changes in risk sentiment.
USD keeps its footing as risk rally fades
The negative shift witnessed in risk sentiment helped the US Dollar (USD) find demand as a safe haven and forced EUR/USD to push lower. Investors stay away from risk-sensitive assets amid growing concerns over a global economic slowdown with China reversing its decision to ease coronavirus-related restrictions.
China reported more than 28,000 new local cases on Monday and the city of Beijing announced that it will be shutting down parks and museums from Tuesday to limit the spread of infections. Markets remain on edge on these developments and the USD holds its ground, capping EUR/USD’s recovery. In the absence of high-tier macroeconomic data releases, the risk perception is likely to continue to impact the USD’s valuation in the second half of the day. As of writing, US stock index futures were down modestly on the day. A sharp decline in Wall Street’s main indexes could provide a boost to the USD and force EUR/USD to start to edge lower. In case the market mood starts to improve, EUR/USD could stage an upward correction in the short term.
EUR/USD technical outlook
EUR/USD is trading near the Fibonacci 23.6% retracement of the latest uptrend at 1.0250. This level is likely to act as a pivot point in the near term. In case 1.0250 is confirmed as support, 1.0300 (psychological level, 20-period Simple Moving Average (SMA) on the four-hour chart) aligns as next resistance ahead of 1.0360 (static level) and 1.0420 (end-point of the uptrend).
With a drop below 1.0250, sellers could take action and drag EUR/USD lower toward 1.0200 (psychological level) and 1.0150 (Fibonacci 38.2% retracement). In the meantime, the Relative Strength Index (RSI) indicator stays near 40, confirming the bearish bias.