EUR/USD trades with a mild negative bias around 1.0870 area, lacks follow-through

• EUR/USD edges lower and snaps a three-day winning streak to over a two-month high.
• A modest USD uptick is seen exerting pressure, though the downside seems cushioned.
• Bets that the Fed is done raising rates should cap gains for the USD and lend support.

The EUR/USD pair struggles to capitalize on the previous day’s blowout rally to the 1.0885-1.0890 area, or its highest level since August 31 and edges lower during the Asian session on Wednesday. Spot prices currently trade around the 1.0870 regions, down less than 0.10% for the day, and for now, seem to have snapped a three-day winning streak, though any meaningful corrective decline seems elusive.

The US Dollar (USD) attracts some buying and reverses a part of Tuesday’s slump to a one-week low, which, in turn, is seen acting as a headwind for the EUR/USD pair. The USD uptick, however, lacks bullish conviction in the wake of growing acceptance that the Federal Reserve (Fed) is done with its policy-tightening campaign. The bets were reaffirmed by softer US consumer inflation figures, showing that the headline CPI was unchanged in October and the yearly rate decelerated from 3.7% in September to 3.2% – marking the smallest rise in two years.

Investors were quick to react and now expect the Fed to keep rates on hold. Furthermore, the current market pricing indicates that the US central bank could start cutting rates in May 2024. This led to the overnight sharp decline in the US Treasury bond yields, which might hold back the USD bulls from placing aggressive bets and help limit the downside for the EUR/USD pair. This, in turn, makes it prudent to wait for strong follow-through selling before confirming that spot prices have topped out and placing aggressive bearish traders.

Market participants now look to the US economic docket, featuring the release of the Producer Price Index (PPI), monthly Retails Sales figures and the Empire State Manufacturing Index later during the early North American session. This, along with the US bond yields and the broader risk sentiment, should drive demand for the safe-haven buck and provide a fresh impetus to the EUR/USD pair.

Technical levels to watch