EUR/USD holds steady above mid-1.0900s on softer USD, lacks follow-through

• EUR/USD attracts some buyers for the second straight day amid a modest USD downtick.
• The divergent Fed-ECB expectations act as a tailwind for the major and remain supportive.
• The upside seems limited ahead of the latest US consumer inflation figures on Thursday.

The EUR/USD pair trades with a positive bias for the second straight day on Tuesday, albeit lacks follow-through and remains confined in the previous day’s broader range.  Spot prices hold steady above mid-1.0900s during the Asian session and draw support from a softer tone surrounding the US Dollar (USD).

The USD Index (DXY), which tracks the Greenback against a basket of currencies, retreats further from a near three-week high touched last Friday amid expectations for an imminent shift in the Federal Reserve’s (Fed) policy stance. The bets were lifted by a report by the New York Fed on Monday, which showed that US consumers’ projection of inflation over the short run fell to the lowest level in nearly three years in December. This, along with a positive sentiment around the Asian equity markets, is seen undermining the safe-haven buck and acting as a tailwind for the EUR/USD pair.

The shared currency, on the other hand, benefits from expectations that the European Central Bank (ECB) will keep interest rates at record highs for some time, bolstered by the expected jump in the Eurozone inflation last month. Adding to this, ECB official Boris Vujcic said on Monday that the central bank does not foresee cutting interest rates before the summer and anticipates a gradual reduction in inflation within the Eurozone. That said, the markets have fully priced a 25 basis points (bps) ECB rate cut by April, which, in turn, is acting as a headwind for the EUR/USD pair.

Moreover, the US monthly employment report released on Friday pointed to a still-resilient labor market and gives the Fed more headroom to keep interest rates higher for longer. Furthermore, the recent less dovish remarks by several Fed officials forced investors to scale back their expectations for more aggressive policy easing and early interest rate cuts, which remains supportive of elevated US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond holds steady above 4.0% and should limit any meaningful downside for the Greenback.

The aforementioned mixed fundamental makes it prudent to wait for strong follow-through buying before positioning for any further appreciating move for the EUR/USD pair. Traders now look to the release of German Industrial Production, French Trade Balance data and the Eurozone Unemployment Rate for some impetus. Later during the US session, a scheduled speech by Governor Michael Barr might contribute to producing short-term opportunities, though investors might prefer to wait for the latest US consumer inflation figures on Thursday.

Technical levels to watch