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- EUR/USD climbs to a fresh multi-month top and draws support from a combination of factors.
- The recent hawkish ECB rhetoric underpins the Euro and remains supportive amid a weaker USD.
- Bets for smaller Fed rate hikes continue to weigh on the buck ahead of the US CPI on Thursday.
The EUR/USD pair remains well supported by a combination of factors and holds steady near its highest level since late May through the Asian session on Thursday. The recent hawkish rhetoric from several European Central Bank (ECB) policymakers continues to benefit the shared currency. This, along with the prevalent US Dollar selling bias, acts as a tailwind for the major.
French central bank governor Francois Villeroy de Galhau said on Wednesday that interest rate hikes would need to be pragmatic in the coming months. Furthermore, ECB Governing Council member Olli Rehn said that several more significant rate hikes are required to restrict growth and dampen inflation. Separately, ECB policymaker Robert Holzmann noted that policy rates would have to rise significantly further to reach sufficiently restrictive levels to ensure a timely return of inflation to the 2% target.
The Federal Reserve, on the other hand, is expected to soften its hawkish stance amid signs of easing inflation. The bets were lifted by last week’s US monthly jobs report (NFP), which showed a slowdown in wage growth during December. Furthermore, business activity in the US services sector hit the worst level since 2009 and suggested that the effects of the Fed’s significant rate hikes in 2022 are being felt in the economy. This fueled speculations that the Fed will slow the pace of its policy tightening and weigh on the US Treasury bond yields.
The yield on the benchmark 10-year US Treasury note drops to a nearly four-week low and continues to undermine the buck. The prevalent risk-on environment, fueled by the latest optimism over China’s pivot away from its zero-COVID policy, further dents the greenback’s relatively safe-haven status. Traders, however, seem reluctant to place aggressive bets and prefer to move to the sidelines ahead of the release of the US consumer inflation figure, due later during the early North American session.
The crucial US CPI report will play a key role in influencing the Fed’s rate-hike path and driving the USD demand in the near term. The Fed policymakers have indicated that they remain committed to combat high inflation and that rates could stay elevated for longer or until there is clear evidence that consumer prices are falling. Hence, a more robust US CPI print will lift bets for a more hawkish Fed and push the USD higher. That said, narrowing the Fed-ECB rate differential should help limit any deeper losses for the EUR/USD pair.
Technical Outlook
From a technical perspective, the occurrence of the golden cross (50-day SMA moving above 200-day SMA) also favours bullish traders. Moreover, positive oscillators on the daily chart, which are still far from being in the overbought territory, support prospects for a further near-term appreciating move. Hence, some follow-through strength beyond the 1.0800 mark, towards testing the next relevant hurdle near the 1.0855 region, looks like a distinct possibility. The momentum could extend further and allow the EUR/USD pair to reclaim the 1.0900 round figure for the first time since April 2022.
On the flip side, the 1.0730 horizontal zone now protects the immediate downside ahead of the 1.0700 mark. Any further decline will attract fresh buyers and remain limited near the 1.0650-1.0645 support zone. That said, failure to defend the said support levels might prompt some technical selling and make the EUR/USD pair vulnerable to weakening further below the 1.0600 mark. Spor prices could then slide to test the 1.0540-1.0535 support zone en route to the 1.0500 psychological mark and the monthly low, around the 1.0480 region. The latter should act as a pivotal point, which, if broken decisively, will shift the near-term bias in favour of bearish traders.
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