Dollar Bullish Momentum Strengthens as Fed Officials Spook Investors with Hawkish Comments

The EUR/USD pair sustained downward pressure for the second consecutive day on Wednesday, tumbling to its lowest point since December 13, hovering around the mid-1.0800s. This descent brought it closer to the 200-day Simple Moving Average (SMA) during the early European session. The US Dollar (USD) extended its breakout momentum this week, surging to a one-month peak. This surge is viewed as a pivotal factor exerting pressure on the major currency pair.Fed Governor Christopher Waller remarked on Tuesday that the central bank won't hastily reduce policy rates unless there is clear evidence of sustained lower inflation. These comments prompted investors to delay expectations for aggressive policy easing, supporting higher US Treasury bond yields. The benchmark 10-year US government bond yield remained above the 4.0% mark, reinforcing the safe-haven appeal of the greenback amidst a generally cautious risk sentiment:Diminished expectations of an early Fed interest rate cut, coupled with heightened military tensions in the Middle East and less-than-stellar Chinese macroeconomic data, subdued investors' appetite for riskier assets. In a recent development, the US conducted an airstrike targeting a Houthi missile facility in Yemen, amplifying threats to merchant vessels and US Navy ships in the Red Sea. Meanwhile, official data from the National Bureau of Statistics indicated that China's economy expanded at an annual rate of 5.2% in the final quarter of 2023. Although China's GDP growth surpassed the government's 5% target for 2023, it was influenced by a lower base for comparison from 2022. On a quarterly basis, Chinese GDP grew by 1.0% in Q3, in line with expectations. The NBS noted that China faces a complex external environment, and low consumer prices reflect insufficient domestic demand. Additional data revealed that China's Retail Sales and Industrial Production increased by 7.4% YoY and 6.8% YoY, respectively, in December. However, this failed to instill optimism or bolster broader risk sentiment. Compounding the downward pressure on the EUR/USD pair are conflicting views on inflation and interest rates among European Central Bank (ECB) policymakers. Bundesbank President Joachim Nagel stated on Monday that it is premature for the ECB to discuss interest rate cuts as inflation remains elevated. Conversely, ECB Governing Council Member Tuomas Valimaki signaled openness to considering rate cuts sooner than most colleagues on Tuesday. An ECB survey on Tuesday revealed that Eurozone consumers have slashed their inflation expectations, anticipating a 3.2% increase in prices over the next 12 months, down from 4.0% a month earlier. Expectations for inflation three years ahead also dipped to 2.2% from 2.5%. These factors failed to attract buyers for the Euro or provide support for the EUR/USD pair. Looking ahead, traders are eagerly awaiting the final Eurozone CPI print for potential market direction. Simultaneously, the US economic docket includes the release of monthly Retail Sales and Industrial Production figures in the early North American session. Additionally, scheduled speeches by Fed Governors Michael Barr and Michelle Bowman, coupled with movements in US bond yields and broader market risk sentiment, are expected to influence USD price dynamics and generate short-term trading opportunities around the EUR/USD pair.