EUR/USD Gains Momentum: Will It Sustain?

The EUR/USD pair climbed back near 1.0410 during the Asian session, recovering losses from Monday. This rebound was largely driven by a subdued US Dollar (USD), as Treasury yields dropped by approximately 2%. The 2-year and 10-year yields now stand at 4.24% and 4.53%, respectively, signaling reduced expectations of aggressive monetary tightening by the Federal Reserve (Fed).

Traders need to focus on:

1. Subdued US Dollar and Treasury Yields

The recent decline in Treasury yields reflects growing concerns about the US economy's resilience in a high-rate environment. Investors appear cautious, speculating that the Fed may adopt a less aggressive policy stance moving forward. However, Fed officials have made it clear that the path to rate cuts will not be rushed, with most cuts likely postponed until 2025. This cautious approach keeps USD sentiment volatile, indirectly influencing the EUR/USD pair.

2. Geopolitical Risks Weigh on Sentiment

The prolonged Russia-Ukraine war and escalating tensions in the Middle East are fueling broader risk aversion, creating headwinds for the Euro. The European Union's reliance on energy imports and its geographic proximity to these conflicts increase economic vulnerabilities, which could weigh on the Euro's medium-term outlook.

3. European Central Bank’s (ECB) Dovish Policies

The ECB's dovish stance is another critical factor. The central bank recently reduced its Deposit Facility rate to 3% and is expected to cut rates further to 2% by mid-2025. This would involve gradual reductions of 25 basis points at upcoming meetings. While such moves aim to stimulate growth, they are likely to reduce the Euro's appeal compared to higher-yielding currencies like the USD, keeping EUR/USD gains capped.

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