EUR/USD in wait-and-see mode close to 1.1300 ahead of key US jobs report, eyes potential pennant breakout

• EUR/USD is in wait-and-see mode and trading close to 1.1300 ahead of the latest official US jobs report.
• The data will primarily be viewed in the context of how it impacts expectations for a March Fed rate hike.
• The euro didn’t react to the latest hotter than expected Eurozone inflation figures for December.

EUR/USD is in wait-and-see mode ahead of Friday’s crucial US labour market report which, analysts suspect, will impact perceptions about whether the Fed will implement its first rate hike in December or not. The pair has been content thus far on Friday’s session to languish within recent ranges close to the 1.1300 level and has in recent hours been swinging either side of its 21-day moving average at 1.1306. EUR/USD’s recent trading patterns have been a dream for technicians who like to play the range; since the end of November, the pair has been locked within a 1.1220s to 1.1380s ish range. But the pair has formed a pennant structure thus far in 2022 that has increasingly squeezed the price action and looks to be at risk of a break-out that the upcoming US jobs report could be a catalyst for.

A bearish break could see the pair test recent December lows in the low 1.1200s, while a bullish break could see EUR/USD scorch past its 50-day moving average at 1.1354 and test recent range highs. In wake of this week’s decisively hawkish Fed minutes that triggered a surge in US yields and a further widening of US/Eurozone rate differentials, a decent labour market report (defined as anything that keeps Fed tightening plans intact), risks do seem tilted to the downside for the pair. Indeed, numerous FX strategists have been disappointed at the dollar’s inability to gain substantial ground this week. Perhaps what the dollar bulls need is the “green light” from a solid labour market report before chasing the buck higher, some analysts have suggested.  

The euro didn’t react to the latest hotter than expected flash estimate of HICP inflation in the Eurozone in December, which showed headline inflation rising at a pace of 5.0% YoY versus forecasts for a drop to 4.7% from 4.9%. But it is worth noting that ECB hawks have been warning that if inflation pressures continue to surprise to the upside, triggering a further upgrade to the ECB’s inflation outlook, the case would build for earlier monetary tightening. Earlier in the week, euro money market pricing implied that investors expect a 10bps rate hike from the ECB as soon as October 2022. Analysts should note that further eurozone inflation surprises have the scope to lift EUR in Q1 2022, especially versus the likes of the yen, though perhaps not against the US dollar is the Fed continues down a decisively more hawkish path.