EUR/USD successfully breached the psychological threshold of $1.08, a short-term resistance barrier in the past week. Currently, the world's most traded currency pair is testing its 200-day moving average just above this level, influenced by a decline in US Treasury yields that exerts downward pressure on the USD.

In addition, the European Central Bank (ECB) released a report indicating that wages in the Eurozone remain relatively high, despite a modest decline in the fourth quarter of the previous year. Negotiated wage growth dropped from 4.7% to 4.5% year-on-year in Q4, signalling a stabilization in the acceleration of wage growth. While other measures of wage growth were already trending downward before this data release, negotiated wages play a significant role in Eurozone wage developments. The impact of robust wage growth on services inflation hinges on the ease with which higher wage costs can be passed on to consumers.

The flash services PMI for January revealed that the index has consistently stayed below the neutral 50 mark for the sixth consecutive month. With the overall outlook for services remaining weak, the prospect of higher wages influencing inflation appears doubtful. Although the ECB is likely to welcome the news of the slight decline in wages, it is anticipated that the central bank will approach monetary policy adjustments cautiously in 2024.

Currently, money markets are indicating a probability of over 50% for a rate cut in April, with an expectation of three additional cuts before the end of the year. This outlook is considered excessively dovish. Consequently, there is potential for the euro to appreciate against the dollar if there is a more hawkish repricing in ECB rate expectations.