Higher rates may benefit Euro

The Euro may benefit and push higher against the US dollar on expectations the European Central Bank (ECB) will keep interest rates at record highs for some time, bolstered by the expected jump in the Eurozone inflation last month. Adding to this, ECB official Boris Vujcic recently said that the central bank does not foresee cutting interest rates before the summer and anticipates a gradual reduction in inflation within the Eurozone. That said, the markets have fully priced a 25 basis points (bps) ECB rate cut by April, which, in turn, is acting as a headwind for the EUR/USD pair.

Moreover, the US monthly employment report released on Friday pointed to a still-resilient labor market and gives the Fed more headroom to keep interest rates higher for longer. Furthermore, the recent less dovish remarks by several Fed officials forced investors to scale back their expectations for more aggressive policy easing and early interest rate cuts, which remains supportive of elevated US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond holds steady above 4.0% and should limit any meaningful downside for the Greenback.

The aforementioned mixed fundamental makes it prudent to wait for strong follow-through buying before positioning for any further appreciating move for the EUR/USD pair. Traders now look to the release of German Industrial Production, French Trade Balance data and the Eurozone Unemployment Rate for some impetus. Later during the US session, a scheduled speech by Governor Michael Barr might contribute to producing short-term opportunities, though investors might prefer to wait for the latest US consumer inflation figures on Thursday.