EUR/USD drops to near 1.0940 as US Dollar recovers in a thin-volume trading session

• EUR/USD slips to near 1.0940 as investors’ risk-appetite eases amid long-weekend-induced volatility.
• The USD Index has rebounded sharply to near 102.60 despite persistent Fed rate-cut bets.
• German real Q4 GDP contracted by 0.3% as expected.

The EUR/USD pair falls to near 1.0940 in the European session. The major currency pair has faced selling pressure as the US Dollar Index (DXY) has recovered in a thin-volume trading session. Investors’ risk-appetite has trimmed amid volatility-induced by extended weekend in the United States on account of Martin Luther King Birthday.

S&P500 futures have witnessed some losses in the London session, indicating a risk-averse market mood. The USD index has recovered sharply 102.60 as investors see other central banks following Federal Reserve’s (Fed) path of rate cuts.

After the Fed, investors see other central banks also reducing interest rates due to easing price pressures and deepening risks of a technical recession. Unlike the Eurozone and the United Kingdom, the US economy is resilient on the grounds of Gross Domestic Product (GDP) growth, consumer spending, and labor market.

Meanwhile, investors await the US monthly Retail Sales data for December, which will be published on Thursday. As per the consensus, the economic data grew by 0.4% against 0.3% increase in November.

The USD Index will continue to be guided majorly by perception towards rate cuts by the Fed. As per the CME Fedwatch tool, traders see a 70% chance in support of rate cut by the Fed in March.

On the Eurozone front, the preliminary GDP of Germany has contracted by 0.3% in the fourth-quarter of 2023 as anticipated. Previously, the German economy grew by 1.8%.

While investors see the European Central Bank (ECB) reducing interest rates sooner, ECB Chief economist Philip Lane has commented that interest rate cut is not a near-term debate considering recent inflation data.