EUR/USD Remains Range-Bound Amid Strong USD and ECB’s Dovish Outlook

The EUR/USD pair is locked in a narrow trading range on Monday and appears susceptible to further declines. The US Dollar (USD) maintains its strength near a six-month high, driven by the Federal Reserve’s (Fed) hawkish stance, which continues to weigh on the pair.

The Fed recently reiterated its commitment to keeping interest rates elevated for an extended period. It also cautioned that persistently high inflation in the US could warrant at least one more interest rate hike by the end of the year. This hawkish outlook has boosted US Treasury bond yields, with the two-year US government bond yield hovering near its highest level since 2006 and the benchmark 10-year Treasury yield nearing a 16-year high. These elevated yields are providing strong support for the US Dollar.

Meanwhile, concerns about a potential property market crisis in China are adding to the USD’s appeal as a safe-haven currency. The Euro (EUR), on the other hand, is grappling with the European Central Bank’s (ECB) recent dovish policy decision. The ECB downgraded its forecasts for both consumer price inflation (CPI) and GDP growth for 2024 and 2025, suggesting that the central bank’s 14-month-long policy tightening cycle may have peaked.

Additionally, the Eurozone’s Purchasing Managers’ Index (PMI) for September revealed ongoing challenges in the manufacturing sector, further fueling concerns of a possible GDP contraction in the second half of the year. These factors have reinforced market expectations that the ECB is unlikely to pursue further interest rate hikes in the near term, putting downward pressure on the EUR/USD pair.

Traders are keeping an eye on the German Ifo Business Climate data for potential market-moving insights. ECB President Christine Lagarde is also scheduled to deliver a speech during the early North American session. While there are no significant US economic releases expected on Monday, the performance of US bond yields and broader risk sentiment will likely impact the USD’s price dynamics and influence short-term trading opportunities for the EUR/USD pair.