EUR/USD pulled back modestly today after weak economic data from euro zone countries, but it's likely to resume steady gains fueled by Fed-inspired dollar weakness -- at least until the late-January ECB meeting. A big downside surprise to Italian November IO and softer January consumer confidence numbers in Germany, Italy and Spain helped sink EUR/USD as government bond yields tumbled. But U.S.
Treasury yields are tumbling faster than German yields, which had narrowed German-U.S.
Eurodollar and fed funds futures prices are rallying, weighing down short-term U.S. rates.
Eurodollars now have 18 basis points of Fed rate cuts priced in for 2020.
Persistently soft U.S. rates should see a resumption of reducing long-dollar positions.
Those reductions should result in EUR/USD gains.
Upside pressure for EUR/USD could persist ahead of the ECB's meeting on January 24th.
At that point EUR/USD bulls will become more cautious over the risk that weakening euro zone data will temper ECB enthusiasm for policy normalization further.
Market expectations for ECB rate hikes might then get pushed back further into 2020, which would likely weigh down EUR/USD.
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