EUR/USD gains ground on Tuesday, trading near 1.0410 during the Asian session after posting losses on the previous day. The EUR/USD pair's rebound can be attributed to a subdued US Dollar (USD) following weaker Treasury yields.
The US Dollar Index (DXY), which tracks the US Dollar (USD) against six major currencies, holds minor losses near 108.00 as US Treasury yields fell by approximately 2% on Monday. The 2-year and the 10-year yields stood at 4.24% and 4.53%, respectively.
However, the risk-sensitive EUR/USD pair faces challenges as the Federal Reserve (Fed) may adopt a more cautious tone regarding potential rate cuts in 2025, signaling a shift in its monetary policy approach. This adjustment comes amidst uncertainties tied to the economic strategies expected under the incoming Trump administration.
Additionally, the safe-haven outflows put pressure on the Euro amid heightened geopolitical risks stemming from the prolonged Russia-Ukraine conflict and ongoing tensions in the Middle East. Israel's ambassador to the United Nations, Danny Danon, issued a stern warning on Monday to Yemen's Iran-backed Houthi militants, urging them to cease their missile attacks on Israel, per Reuters.
The European Central Bank (ECB) maintains dovish guidance on interest rate policy for the next year, which puts downward pressure on the Euro and the EUR/USD pair. The ECB reduced its Deposit Facility rate by 100 basis points (bps) to 3% this year and is expected to lower it to 2%, which policymakers see as a neutral rate, by the end of June 2025. This suggests that the ECB will cut its key borrowing rates by 25 bps at every meeting in the first half of next year.
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