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- EUR/USD is seen consolidating its recent gains to the highest level since April 2022.
- Bets or smaller rate hikes by the Fed continue to weigh on the USD and lend support.
- The recent hawkish commentary by ECB officials further acts as a tailwind for the pair.
- Traders now seem reluctant ahead of the US macro data and key central bank meetings.
The EUR/USD pair oscillates in a narrow band above the 1.0900 mark during the Asian session on Thursday and consolidates its recent gains to the highest level since April touched earlier this week. Traders seem to have moved to the sidelines and prefer to wait for important US macro data, which will influence the Fed's rate-hike path and provide a fresh directional impetus. The Advance US Q4 GDP print is due for release later during the early North American session. This will be followed by the Core PCE Price Index – the Fed's preferred inflation gauge – on Friday. In the meantime, the prospects for a less aggressive policy tightening by the US central bank keep the USD bulls on the defensive near an eight-month low and acts as a tailwind for the major.
Investors seem convinced that the Fed will soften its hawkish stance amid signs of easing inflationary pressures in the US. In fact, the CME's FedWatch Tool points to over a 90% probability for a smaller 0.25 bps rate hike at the next FOMC meeting that concludes on February 1. This would mark a further moderation in the pace of the rate-hike cycle, which, in turn, keeps a lid on the recent move up in the US Treasury bond yields and continues to weigh on the buck. Apart from this, a more hawkish commentary by European Central Bank (ECB) officials, signalling additional jumbo rate hikes in coming months, underpins the Euro and lends support to the EUR/USD pair.
ECB Governing Council members Joachim Nagel and Gabriel Makhlouf said on Wednesday that they would not be surprised if interest rate increases continue into the second quarter after two expected moves in February and March. This comes after ECB President Christine Lagarde earlier this week repeated the recent policy guidance and said that the central bank will keep raising borrowing costs quickly to slow inflation, which remains far too high. Hence, the market focus will remain glued to next week's key central bank event risks – the outcome of a two-day FOMC meeting on Wednesday and the ECB decision on Thursday. The ECB, meanwhile, is expected to remain more hawkish.
The aforementioned fundamental backdrop favours bullish traders and suggests that the path of least resistance for the EUR/USD pair is to the upside. That said, the prevalent cautious market mood – amid concerns about a deeper global economic downturn – lends some support to the safe-haven greenback. This, in turn, might cap any meaningful upside for the major in the absence of any relevant market-moving economic releases from the Eurozone.
Technical Outlook
From a technical perspective, bulls might wait for some follow-through buying beyond the April 2022 peak, around the 1.0935 area, before placing fresh bets. The EUR/USD pair might then accelerate the momentum towards reclaiming the 1.1000 psychological mark. The momentum could get extended further towards the 1.1070 intermediate hurdle en route to the 1.1100 round figure.
On the flip side, any corrective pullback might find decent support near the 200-hour SMA, currently around the 1.0850-1.0855 region. Failure to defend the said support might prompt some intraday selling and drag the EUR/USD pair towards the 1.0800 mark. This is followed by the 1.0780-1.0775 horizontal resistance breakpoint, now turned support, which should act as a pivotal point. A convincing break below the latter should pave the way for a slide towards testing the next relevant support near the 1.0700 mark. Some follow-through selling will negate the positive outlook and shift the near-term bias in favour of bearish traders.
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