EUR/USD floats above 1.0600

- EUR/USD seesaws around a six-month high after posting the biggest daily gains in two weeks.

- Traders notched down hawkish Federal Reserve bets after United States inflation data, 50 bps rate hike is given.

- Firmer statistics from Germany, Euro Area tame recession woes and underpin bullish bias for Euro.

- Fed’s hints for future rate hikes will be crucial for EUR/USD traders.

EUR/USD portrays the typical pre-Fed consolidation as it makes rounds to 1.0630-20 ahead of the key Federal Open Market Committee (FOMC) monetary policy meeting on Wednesday. In doing so, the Euro stays sidelined near the highest levels in six months, backed by dovish hopes from the US Federal Reserve (Fed), as well as due to recently firmer statistics from Euro Area.

EUR/USD bulls cheer hopes of Federal Reserve’s smaller rate hike

EUR/USD rallied the most in a fortnight after the market’s bets for slower rate increases in 2023 soared on the downbeat release of the US inflation data.

US Consumer Price Index (CPI) dropped to 7.1% YoY in November versus the 7.3% expected and 7.7% prior. Further, the CPI ex Food & Energy, known as the Core CPI, also declined to 6.0% YoY during the stated month compared to 6.1% market forecasts and 6.3% previous readings.

“Fed funds futures prices implied a better-than-even chance that the Fed will follow its expected half-point interest-rate hike this week with a smaller 25-basis-point rate hike in February, ultimately raising rates no higher than the 4.5%-4.75% range in its battle to beat inflation,” said Reuters. The news also added that traders were betting on a second half-point hike in February before the inflation report.

The US inflation data drowned the US Dollar Index (DXY) to a six-month low and allowed Wall Street to close in the positive territory. Further, the US Treasury bond yields also dropped the most in a week to snap a three-day uptrend, which in turn offered additional strength to Euro.

Firmer local data also underpin Euro run-up

Other than the less-hawkish Fed bets, the recent improvement in the Euro Area economics also seemed to have favored the EUR/USD prices.

The German ZEW survey data showed that the Economic Sentiment Index rose to -23.3 in December from -36.7 prior and the market expectation of -26.4. Furthermore, the Current Situation Index rose to -61.4 from -64.5 but fell short of the market expectation of -57. It should be noted that the ZEW Economic Sentiment Index for the Eurozone rose to -23.6 from -38.7. 

Risks emanating from China, Russia join pre-Fed, ECB mood to test EUR/USD bulls

The International Monetary Fund (IMF) Managing Director Kristalina Georgieva was spotted expecting slower economic growth for China due to the latest jump in the daily Covid cases. Additionally, Bloomberg came out with the news suggesting that the Chinese leaders delayed the economic policy meeting due to the COVID-19 problems.

On the other hand, Russian President Vladimir Putin is openly rejected supplying oil to countries respecting the Euro Area-backed price cap and is at loggerheads with Ukraine for a long, which in turn challenges the risk appetite and the EUR/USD price.

Above all, the cautious mood ahead of the Federal Reserve’s (Fed) verdict, as well as the anxiety ahead of the European Central Bank (ECB) meeting, keeps the EUR/USD on a dicey floor.

While the Fed is almost set for a 50 bps rate hike, the Euro traders will pay more attention to how the US central bank is prepared to retreat from the rate hike cycle during 2023, as well as the economic projections. “Markets are now obviously going into it with a very dovish mindset – that’ll be fine if the Fed are dovish, but that doesn’t align at all well with recent comms, especially with US services inflation still rising, and the labor market so tight, and we may be in for a bumpy ride,” said analysts at ANZ ahead of the FOMC.

Talking about the ECB, the latest comments from the policymakers and firmer Euro Area data, the regional central bank is expected to sound hawkish despite likely unveiling the 50bps rate hike after two consecutive 75 bps increases in the benchmark rates.

EUR/USD technical analysis

EUR/USD bulls have miles to go before retaking the throne despite rising to the highest levels in six months, as well as posting the biggest daily jump in a fortnight.

The reason could be witnessed by a slew of upside hurdles for the Euro and the overbought conditions of the Relative Strength Index (RSI) line, placed at 14.

Among the major ones, a downward-sloping resistance line from September 2021, close to 1.0690 by the press time, gains the immediate attention of the EUR/USD bulls.

Following that, a horizontal area comprising March’s low and May’s high, near 1.0785-810, will be a tough nut to crack for the EUR/USD buyers.

In a case where EUR/USD manages to remain firmer past 1.0810, the odds of its run-up towards the high marked in March and the yearly top, respectively near 1.1185 and 1.1495, can’t be ruled out.

Alternatively, pullback moves could aim for the mid-November swing high near 1.0480 before highlighting the 38.2% Fibonacci retracement level of the EUR/USD pair’s one-year-long downturn starting from September 2021, close to 1.0430.

It’s worth observing, however, that a confluence of the 200-DMA and a three-week-old support line, near 1.0365 and 1.0350 in that order, appear the key for the EUR/USD bears as a break of which could re-establish the bearish trend.

Overall, Euro remains off the bear’s radar but the way toward convincing bulls is long and bumpy.

Trend: Limited upside expected

EUR/USD: Daily chart