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EUR/USD ticks up, as dollar weakens amid soft U.S. GDP data

EUR/USD gained nearly 0.40% on Tuesday to close above 1.09

Investing EUR/USD rose moderately on Tuesday on a thin day of trading, as soft U.S. GDP data weighed heavily on a steadily weakening dollar.

The currency pair traded in a tight range between 1.0902 and 1.0984 before settling at 1.0954, up 0.0039 or 0.36% on the session. The euro is enjoying a modest three-day winning streak versus the dollar and is up by 0.26% against its American counterpart since the Federal Reserve raised short-term interest rates for the first time in nearly a decade last week. More broadly, the euro is up by more than 3.20% against the dollar since the European Central Bank rattled global currency markets by only instituting limited easing measures with comprehensive asset-purchasing program at a closely-watched meeting at the start of the month. The dollar is currently down by nearly 2% against a basket of rivals in December, suffering its worst month since April.

EUR/USD likely gained support at 1.0538, the low from December 3 and was met with resistance at 1.1496, the high from Oct. 15.

The moves by the Fed and the ECB over the last several weeks could portend further divergence between the two major central banks, as the Fed completes the early stages of its first tightening cycle since 2004. Earlier this week, analysts from Charles Schwab(N:SCHW) said 20 central banks, representing roughly one-third of global GDP, hiked interest rates in 2015, marking a sharp divergence from recent monetary policy over the past several years. More importantly, the analysts noted that “volatility may result as the widening divergence contributes to the challenges facing some markets.” Markets throughout the euro zone may be equipped to handle the shifts in monetary policy, according to Schwab, amid signs of improving economic and financial growth.

On Tuesday morning, the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA) said real gross domestic product in the third quarter increased at a rate of 2.0%, down sharply from annual GDP growth of 3.9% in the second quarter of 2015. The BEA’s third estimate released on Tuesday also fell slightly from its second estimate of 2.1% growth issued last month. Real GDP measures the value of the goods and services produced by a nation’s economy minus the goods and services used up in production, adjusted for price changes.

The BEA noted in its statement that the mild increase in real GDP is reflected in positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, state and local government spending, residential fixed investment, and exports that were partly offset by a negative contribution from private inventory investment.

At the same time, the deceleration in GDP growth on a quarterly basis denoted a downturn in private inventory investment and exports. Inventory growth was downwardly revised by nearly $5 billion to $85.5 billion, as businesses held inventories down amid slumping sales. Nevertheless, quarterly real GDP fell in line with consensus estimates of growth of 2.0%. The GDP Price Index, meanwhile, increased 1.3% on the quarter, remaining unchanged from the previous quarter.

Investors await Wednesday’s monthly release of the PCE index for November for further indications on the gradual path the Fed may take in its first tightening cycle since 2004. Core PCE inflation, which strips out volatile food and energy prices, has remained below the Fed’s targeted goal of 2% for every month over the last three years. In October, core PCE prices were up by 1.3% on a yearly basis, remaining flat from the prior month’s reading.

In updated inflation forecasts released last week, the Fed projected that inflation will not reach its targeted objective until 2018. Last week, the Federal Open Market Committee (FOMC) raised the target range of its benchmark Federal Funds Rate by 25 basis points to 0.25 and 0.50%.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, fell more than 0.35% to an intraday low of 98.01, before closing at 98.18. Earlier this month, the index eclipsed 100.00, reaching its highest level on the calendar year.

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