EUR/USD is trading in a positive range around 1.0850 during the European session on Monday. The US dollar is dragged down by weak US Treasury yields.
USD under selling pressure
The EUR/USD pair is slightly strengthening in the price band of 1.0850 at the beginning of the week. The US Dollar is under selling pressure after Friday's directional struggle, although the major pairs remain at stable levels. Market sentiment deteriorated during Asian trading hours following news late last week that Moody's Investors Services had removed credit from several Chinese companies, sparking concerns about the country's economic health.
Sentiment in Europe has partially improved as most local indices are trading in the green from the start of the week, but investors remain cautious ahead of inflation-related numbers scheduled for the full week. Thursday (29.02.2024) the US will release the Core Personal Consumption Expenditures (PCE) price index, the Federal Reserve's (Fed) favorite inflation gauge. In the coming days, Europe and Germany will release preliminary estimates of February's Harmonized Index of Consumer Prices (HICP), while China will release official producer managers' indexes (PMIs).
Is it better to cut interest rates later?
European Central Bank policymakers continue to tamp down expectations of an early rate cut, supporting the EUR/USD pair. ECB's Robert Holzmann said on Friday that the main risk to a rate cut is tensions in the Red Sea and that it is better to cut rates later than to do it too soon.
In addition, ECB Executive Board member Isabel Schnabel noted that monetary policy had a weaker impact on dampening demand for services. In addition, ECB policymaker and Bundesbank chief Joachim Nagel said it was too early to cut interest rates as the price outlook was not yet clear enough. ECB President Christine Lagarde said that the negotiating rounds in the first quarter will be crucial for upcoming interest rate decisions.
Technical outlook
From a technical perspective, last week's move above the 23.6% Fibonacci retracement of the December-February decline was seen as a key "bullish trend trigger". Moreover, the oscillators on the daily chart have just started to gain positive traction and confirm the positive outlook. That said, it will still be prudent to wait for a move above the very important 200-day simple moving average (SMA).
The EUR/USD pair could then look to breach the 1.0865 zone, or the 38.2% Fibo level, before focusing on retesting the multi-week high reached last Thursday. Some follow-through buying above the 1.0900 level should lift the EUR/USD pair further towards the 50% Fibo level around 1.0965-1.0970. The momentum could extend further and allow the bulls to regain the psychological 1.1000 level for the first time since January 11.
