EUR/USD languishes near one-month low set on Tuesday, seems vulnerable to slide further

• EUR/USD attempts a modest recovery from over a one-month low touched on Tuesday.
• Mixed signals from ECB policymakers might hold back bulls from placing aggressive bets.
• Diminishing odds for an early Fed rate cut underpin the USD and should cap the upside.

The EUR/USD pair ticks higher during the Asian session on Wednesday and recovers a part of the previous day’s downfall to over a one-month low. Spot prices currently trade with modest intraday gains, around the 1.0880 region, though the fundamental backdrop favours bearish traders and suggests that the path of least resistance is to the downside.

The shared currency struggles to attract any buyers in the wake of mixed views on inflation and interest rates by the European Central Bank (ECB) policymakers, raising uncertainty over the timing of rate cut moves. In fact, Bundesbank President Joachim Nagel said on Monday that 
it is too early for the ECB to discuss cutting interest rates as inflation remains high. In contrast, ECB Governing Council Member Tuomas Valimaki on Tuesday signalled his openness to consider lowering interest rates sooner than most of his colleagues. This, along with the underlying bullish sentiment surrounding the US Dollar (USD), validates the near-term negative outlook for the EUR/USD pair.

The USD Index (DXY), which tracks the Greenback’s performance against a basket of currencies, stands tall near its highest level since December 13 and continues to draw support from reduced bets for an early rate cut by the Federal Reserve (Fed). Against the backdrop of slightly hot US consumer inflation figures last week, Fed Governor Christopher Waller said on Tuesday that the US central bank needs to be cautious and cannot rush into rate cuts as the economy remains in good shape. This remains supportive of elevated US Treasury bond yields, which, along with a softer risk tone, act as a tailwind for the safe-haven buck and contribute to capping the EUR/USD pair.

Hence, any subsequent move up might still be seen as an opportunity for bearish traders and run the risk of fizzling out rather quickly. Market participants now look to the release of the final Eurozone CPI print, which might influence the Euro. The US economic docket, meanwhile, features monthly Retail Sales and Industrial Production figures, due later during the early North American session. This, along with speeches by Fed Governors Michael Barr and Michelle Bowman, the US bond yields and the broader risk sentiment, will influence the USD and produce short-term trading opportunities around the EUR/USD pair.

Technical levels to watch