EUR/USD has reached a new nine-month high against the US Dollar. However, the euro bulls may have overextended themselves. There are signs that the ECB is easing the pace of rate hikes this year. The ZEW report in Germany showed a weaker than expected reading, which may also impact the DAX.
Last week, the pair bounced back from a weak start and closed the week around the 1.0820 mark. It is currently trading around the 1.05528 level. This level represents the first retracement of the recent run of gains. In the short term, the bulls will continue to hold up the current level. If the bears can break below the low of the day, the price is likely to drop quickly. On the other hand, if the bulls can hold above the retracement point, there may be more room for consolidation.
The euro has risen more than two percent in the last two weeks, which is the largest gain in more than a year. It has been pushed above the 1.0900 barrier for the first time since April 2022. But while the euro bulls are closing in on the 1.0800 target, the euro may still be overextended. A failure to break above this point could prompt a quick fall to the 38.2% Fibonacci retracement of 1.0600.
In addition, the ECB Governing Council member Ignazio Visco said that Italy will cope with the effects of the monetary policy tightening. The euro also benefited from a softer US dollar, which helped it hit its ninth-month high against the greenback. Some economists have predicted that the ECB will raise 50bps in February, which should boost the euro.
Eurobulls may have hit a wall after their recent move, but they are also edging into a trading band that dates back to the peaks of April. With some of the key indicators for the eurozone slowing down, investors are hopeful that it will be easier to reduce economic hit than it was in 2018. They’re also looking for a slowing of inflation.
While the US economy remains shaky, there is still a chance that it could slip into a recession. Although the Federal Reserve has started hiking borrowing costs earlier than the ECB, it is also expected to slow its rate hikes this year. Given the looming fears of inflation, the recession risk is always on the table.
Investors should also note that the US Treasury bond yields have recovered from their multi-month lows. The US dollar has gained from its long-term weakness, but it hasn’t reached a high level of optimism. This, combined with the Fed’s expected hikes, has kept the single currency bid intact. As the Fed’s next policy meeting approaches, traders will want to keep a close eye on the US growth figures.
If the euro bulls can maintain the current momentum, they could regain control of the 1.0800 level. However, if they can’t, the price is likely to consolidate around the 1.0900 area.