• EUR/USD pares losses despite subdued Eurozone, and German GDP growth.
• The Euro faces a challenge in anticipation of ECB rate cuts ahead.
• Eurozone GDP YoY and QoQ showed readings of 0.1% and 0.0%, respectively, in Q4, while the German economy contracted.

The EUR/USD pair retraces its recent gains, edging higher to near 1.0840 during the European trading hours on Tuesday. Still, the Euro has recovered its intraday losses after Eurozone GDP data signaled that the bloc’s economy stagnated in the fourth quarter, better than the mild contraction expected. However, the heightened tension in the Middle East bolsters the US Dollar (USD) and consequently exerts downward pressure on the EUR/USD pair. Anticipation is growing that the United States (US) President Joe Biden’s administration may approve military strikes in response to a recent drone attack on a US outpost in Jordan. This attack resulted in the tragic loss of three US troops and inflicted injuries on at least 24 others.

The Euro (EUR) encounters a challenge due to increasing market expectations of interest rate cuts by the European Central Bank (ECB). There is prevailing anticipation among market participants of a 50 basis points (bps) reduction by June and a more significant 140 bps cut by December. However, on Monday, ECB Vice President Luis de Guindos suggested that the ECB would consider interest rate cuts only when there is confidence that inflation aligns with the central bank's 2.0% goal.

Eurozone seasonally adjusted Gross Domestic Product (GDP) increased by 0.1% YoY in the fourth quarter from the flat 0.0% prior. GDP (QoQ) was unchanged against the expected 0.1% decline. Germany’s preliminary Gross Domestic Product year-over-year contracted by 0.2% in the fourth quarter as expected, against a 0.4% decline prior. GDP (QoQ) decreased by 0.3%, as expected, from the previous figure of a 0.1% fall.

The US Dollar, measured by the US Dollar Index (DXY), may encounter challenges due to the falling US Treasury yields. The release of an enhanced US balance sheet has contributed to the support of prices for US Treasury bonds, undermining the Greenback. This could limit the losses of the EUR/USD pair.

The decrease in US yields seen since October has played a part in reinforcing the sustainability of the US Treasury. Furthermore, the robust economic growth has led to an improvement in tax receipts. The US Treasury Department has recently announced plans to borrow $760 billion in the first quarter, a reduction from the initial estimate of $816 billion in October