Euro approaches recent highs favoured by a positive market sentiment and USD weakness

• The Euro is crawling higher on Tuesday amid favorable risk sentiment. 
• The US Dollar remains near recent lows despite the hawkish rhetoric by Fed officials.
• Eurozone CPI confirms the deflationary trend and casts doubt about ECB´s "higher for longer" view.

The Euro (EUR) appreciates in a slow but steady way on Tuesday, with the Dollar steady near multi-month lows. The recent dovish pivot by the US Federal Reserve (Fed) and investors´ confidence that the US central bank will start trimming rates in the first quarter of 2024 are fuelling the positive market mood and weighing on the safe haven USD.

This favorable scenario has buoyed the Euro to session highs beyond 1.0950, approaching recent highs at 1.1010. The common currency has been unfazed by the Eurozone Consumer Prices Index (CPI) report, which has confirmed that inflation is decelerating at a fast pace.

The headline CPI contracted at a 0.6% pace in November, with the yearly inflation declining to 2.4% from 2.9% in October.  The Core CPI, which removes the impact of seasonal products like food and energy, eased to 3.6% yearly pace, from 4.2% in October. These figures, combined with the negative GDP and the weak PMI figures seen earlier this month bring into question the hawkish rhetoric by ECB President Christine Lagarde and might add negative pressure on the Euro.

On the other hand, the recent hawkish comments by Fed officials, like Chicago Fed President, Austan Goldsbee, who denied any commitment to cut rates soon, have failed to provide a significant impulse to the US Dollar. US bond yields remain near multi-month highs with traders pricing in rate cuts in March, which keep US Dollar bulls in check.

Investors are waiting for the release of an array of key US indicators on Friday, with a special attention on the PCE Prices Index, which will provide further additional cues about the Fed monetary policy outlook.

Daily digest market movers: The Euro remains moderately positive in a risk-on environment

• The Euro advances on on Tuesday, favored by a positive market mood and a weak US Dollar.
   
• Eurozone CPI data confirmed that inflation is retreating at a fast pace and feeds speculation that the ECB will start cutting rates in early 2024.
   
• ECB´s Villeroy signaled the end of rate hikes and suggested that rate cuts will happen at some point in 2024.
   
• Mixed US Construction data revealed higher-than-expected housing starts in November, while building permits declined beyond expectations. 
   
• Last week, the ECB kept rates on hold with President Lagarde keeping a hawkish tone in contrast with the Fed´s dovish pivot, that sent the Euro higher against the US Dollar.
   
•  Weak Eurozone Q3 GDP and PMI figures have endorsed the case for an economic slowdown, which has cast doubt on the ECB´s hawkish message, boosting hopes of rate cuts in early 2024.
   
• The escalating tensions in the Middle East and growing concerns about Oil supply disruptions are pushing Crude prices higher. This might weigh on the Euro as it would increase inflation pressures in a moment of weak economic growth.
   
• The US Dollar remains weak, with US bonds depressed as futures markets price a 65% chance of a 25 bps rate cut in March 2024.

Technical Analysis: Euro is bouncing from support at 1.0880

Euro reversal from the 1.1010 resistance area, has been contained above the 1.0880 support area and the pair has been trimming losses so far this week. The favourable market sentiment has buoyed the pair to reach the upper range of 1.0900 and approach the 1.1000 resistance area again.

The 1.1010 resistance area, however, is likely to offer a significant resistance as it has capped that pair twice so far. Above here, the next targets would be the August high at 1.1060, and the July 24 and 27 high at 1.1150.

To the downside, a bearish reaction below the December 14 low at 1.0880 and the 4-hour 100 Simple Moving Average (SMA) at 1.0870 would increase bearish pressure towards 1.0825 on the way to 1.0730 lows.