EUR/USD stabilizes but remains stuck below 1.0800 due to policy divergence between Fed and ECB

• EUR/USD is trading flat on Tuesday as Eurozone yields trade higher against US yields.
• But the pair is still unable to recapture the 1.0800 level and the bears continue to watch for a retest of the recent lows.
• Meanwhile, FX strategists continue to cite geopolitics and the Fed/ECB policy divergence as factors weighing on the pair’s short-term outlook.

A comparatively large jump in euro zone bond yields against their US counterparts, which are trying to catch up given the European markets close on Monday, is supporting the EUR/USD on Tuesday. The pair is currently trading flat on the day, although it has again been unable to sustain above the 1.0800 level, which probably keeps bears confident that an eventual retest of last week’s yearly lows in the 1.0750 area will eventually will be tested again.

Indeed, most FX strategists and market commentators continue to favor EUR/USD heading lower as a result of a widening divergence between the Fed’s and ECB’s response to elevated inflation pressures. While the ECB is expected to do little more than end its QE program and may implement some rate hikes by the end of the year, some Fed members (James Bullard on Monday) are even now talking about a possible rate hike. 75 bp at next month’s meeting.

The focus remains on the divergence between the Fed and the ECB when both ECB President Christine Lagarde and Fed President Jerome Powell speak at the IMF and World Bank meetings on Thursday. EUR/USD bears are eyeing a test of 2020 lows at 1.0650, against the backdrop of recent negative developments in the Russo-Ukrainian conflict (Russia escalating its assault in the east) also cited as support for a biggest drop.

Technical levels