ECB Faces An Uphill Battle To Defend Fed-Led Gains In EUR/USD Past 1.1000

During a three-day rally, moderate buying took place near 1.1020, which is close to the highest level since April 2022. Traders await new clues before the European Central Bank’s (ECB) meeting on monetary policy. So, the major currency pair protects the Fed’s gains, and the market’s mood stays cautiously optimistic.

The Fed soaked the US Dollar with its 0.25% dovish rate hike, which was well anticipated and priced in. The main focus, however, was on the Fed’s statement easing inflation pressures and Chairman Jerome Powell’s indications of rate reductions in late 2023 if inflation falls faster. Downbeat US statistics, hopes for more Chinese stimulus, optimistic markets, and lower yields on US Treasury bonds all helped the EUR/USD bulls.

The lower readings of the US ISM Manufacturing PMI and ADP Job Change, among other key US data, drew significant attention and weighed on the greenback ahead of the Fed’s super-duper moves.

The Eurozone Harmonized Index of Consumer Prices (HICP) fell to 8.5% YoY, lower than the 9.0% predicted and the 9.5% seen before. The core HICP came back at 5.2% YoY, which was higher than the 5.1% predicted by the market. It’s worth mentioning that Germany’s GDP for the fourth quarter (Q4) and the current retail sales statistics have posed a challenge to ECB hawks, as both indicate the need for easy money for the bloc’s powerhouse. Political fights with Russia and disagreements within the bloc about its economic rules and oil price caps also strained the finances of the old continent.

In response, Wall Street rallied, and US 10-year Treasury rates fell the most in two weeks, reaching the lowest values in a week. In the same vein, US two-year Treasury bond coupons have just risen to 4.11%. It should be noted that the US 10-year rates are licking their wounds near 3.41%, while the S&P 500 Futures are printing minor gains all around highest levels until August 2022, as of the press time.

To summarize, the EUR/USD is anticipated to continue to strengthen as the ECB prepares to raise interest rates by 0.50% and the Fed follows market expectations by remaining dovish. However, the capacity of the major currency pair to resist the drop depends on how effectively ECB President Christine Lagarde justifies further rate hikes.

Aside from the ECB, US Factory Orders for December are likely to increase by 2.3% versus -1.8% before, and US Preliminary Nonfarm Productivity for the final quarter (Q4) is expected to increase by 2.4% versus 0.8% previously. Above all, Friday’s US jobs data for January will be critical in providing clarity.

EUR/USD Technical Outlook

The EURUSD has been trending higher and looks set to continue this trend in the near future. The exponential moving average (EMA50) has a bullish bias, which means that the market will likely keep going up. Our target for the day is 1.1030, meaning that prices need to remain above this level for it to be reached. The EUR/USD will likely move between 1.0800 (support) and 1.1260 (resistance).

The technical outlook anticipates the prices of the EUR/USD pair to rise today due to bullish sentiment.