EUR/USD consolidates in a range above 1.0700, remains close to multi-week top set on Monday

• EUR/USD remains confined in a narrow trading band for the second straight day.
• The USD recovers further from a multi-week low and caps the upside for the pair.
• The lack of follow-through warrants caution before placing aggressive bearish bets.

The EUR/USD pair extends its sideways consolidative price move during the Asian session on Tuesday and trades below its highest level since September 13 touched the previous day. Spot prices, however, manage to hold above the 1.0700 mark and remain at the mercy of the US Dollar (USD) price dynamics.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, builds on the overnight bounce from a near eight-week low and turns out to be a key factor acting as a headwind for the EUR/USD pair. Federal Reserve (Fed) officials offered a mixed signal over the future rate-hike path, which, in turn, led to a goodish move up in the US Treasury bond yields on Monday and prompted some USD short-covering move.

Fed Governor Lisa Cook noted that the central bank's current target interest rate is adequate to return inflation to the Fed's 2% target, though said that we will continue to be vigilant to ensure that the inflation target is reached. Separately, Minneapolis Fed President Neel Kashkari said that he would err on the side of overtightening monetary policy rather than not doing enough to bring inflation down to the central bank's 2% target.

This raises the uncertainty over the Fed's next policy move. In fact, investors now seem convinced that the US central bank is nearing the end of its rate-hiking cycle and the bets were reaffirmed by the softer US jobs data on Friday. Moreover, the current market pricing indicates a greater chance of the Fed cutting rates in June 2024. Hence, the focus will remain glued to Fed Chair Jerome Powel's appearance on Wednesday and Thursday.

In the meantime, the European Central Bank (ECB) President Christine Lagarde's hawkish remarks over the weekend continue to underpin the shared currency and help limit the downside for the EUR/USD pair. In an interview with Kathimerini, Lagarde reiterated the central bank’s determined path and said that we are determined to bring inflation down to 2%. This is holding back traders from placing bearish bets around the major.

Market participants now look to the release of Chinese Trade Balance data, which might influence the broader risk sentiment and German Industrial Production for some impetus ahead of the US Trade Balance data. Apart from this, traders will take cues from speeches by a slew of influential FOMC members. This, in turn, will drive the USD demand and allow traders to grab short-term opportunities around the EUR/USD pair.

Technical levels to watch