EUR/USD adjusts lower as Federal Reserve officials support a continued restrictive policy stance

EUR/USD drops to around 1.0450 in Tuesday's European session after failing to hold above the psychological resistance level of 1.0500 over the past two trading days. The pair weakens as the US Dollar Index (DXY), which tracks the Greenback against six major currencies, rebounds from a two-month low and rises to nearly 107.00.

The US Dollar gains traction as investors anticipate that the Federal Reserve (Fed) will maintain interest rates in the current range of 4.25%-4.50% for an extended period. On Monday, several Fed officials remarked that no immediate policy adjustments are needed at this time.

Fed Governor Michelle Bowman expressed the need for "greater confidence" in inflation progress before considering further changes, emphasizing the importance of reviewing economic indicators and the administration's policies.

Philadelphia Fed President Patrick Harker also suggested that the Fed should keep rates steady, citing strong economic growth, a balanced labor market, and persistent inflation. He was optimistic that inflation would decrease over time but did not provide a timeline for policy changes.

Investors are awaiting the release of the Federal Open Market Committee (FOMC) minutes from the January policy meeting on Wednesday for more insights into the Fed's monetary policy outlook. The Fed paused its monetary easing cycle during the meeting, with Chairman Jerome Powell signaling that future policy adjustments would only be made when there is "real progress" in inflation or signs of weakness in the labor market.

Daily Digest: Market Movers

• EUR/USD's decline is also influenced by weakness in the Euro (EUR). European Central Bank (ECB) policymaker and Bundesbank President Joachim Nagel warned that US tariffs could negatively impact Germany's economic outlook, which has already been struggling with contraction over the past two years.
• Nagel highlighted Germany's export dependency, noting that economic output in 2027 could be 1.5% lower than previously forecast. The Bundesbank currently expects the German economy to grow by only 0.2% this year and 0.8% in 2026.
• Concerns over US tariffs on Germany escalated after US President Donald Trump announced plans to impose tariffs on imported cars starting around April 2. In 2023, Germany exported $24.3 billion worth of cars to the US, according to OEC data.
• Additionally, expectations that the ECB will cut interest rates three times this year have capped the Euro's potential upside. These expectations are fueled by growing concerns that inflation will fall short of the ECB's 2% target.
• On the economic front, the Eurozone's ZEW Economic Sentiment Index for February slightly missed estimates, coming in at 24.2, just below the expected 24.3, but a notable improvement from January's reading of 18.0.

Technical Analysis: EUR/USD Pullback from 1.0500

EUR/USD experiences a retreat after encountering resistance near the psychological level of 1.0500. Despite this pullback, the overall outlook remains bullish as the pair continues to trade above the 50-day Exponential Moving Average (EMA), currently around 1.0430.

The 14-day Relative Strength Index (RSI) is struggling to break above the 60.00 mark. A sustained move above this level would signal the potential for renewed bullish momentum.

On the downside, the February 10 low of 1.0285 is a key support zone to watch. On the upside, the December 6 high of 1.0630 remains a critical resistance level for the Euro bulls.