EUR/USD steadies near 1.0500 after reversing from multi-day high, Fed vs. ECB concerns eyed

• EUR/USD remains sidelined after taking a U-turn from the highest levels since late June.
• US Dollar struggles to extend the previous day’s rebound from five-month low.
• US inflation expectations challenge Fed hawks but firmer data keeps pair bears hopeful.
• Downbeat EU data fails to justify hawkish hopes from the ECB and weigh on prices.

EUR/USD treads water around 1.0500, struggling to extend the previous day’s pullback from a multi-day top, as traders await more clues during early Tuesday morning in Europe.

The major currency pair rallied to the highest levels since June 28 before reversing from 1.0594 the previous day. The bearish bias seemed to have taken clues from the downbeat data from Eurozone, as well as firmer US statistics.

Even so, the recent retreat in the US inflation expectations from a one-month high, per the St. Louis Federal Reserve (FRED) data,  from a one-month high challenge the recently hawkish bias over the US Federal Reserve’s (Fed) next move. The latest prints of the 5-year and 10-year inflation expectations portray a pullback from the one-month high to 2.46% and 2.39% respectively. Also likely to have challenged the EUR/USD bears could be the market’s cautious optimism amid talks of China’s likely removal of the Zero-Covid policy.

On Monday, Eurozone Retail Sales dropped more than -2.6% YoY forecasts and 0.0% (revised up) prior readings to -2.7% yearly figures for October. Further, the bloc’s S&P Global Services PMI eased to 48.5 in November versus 48.6 initial forecasts but the Composite PMI confirmed 48.7 flash predictions. It’s worth noting, however, that Germany’s S&P Global/BME Composite PMI declined to 46.3 from 46.4 previous forecasts while the Services PMI dropped to 46.1 versus 46.4 initial forecasts.

Alternatively, US ISM Services PMI rose to 56.5 in November versus 53.1 market forecast and 54.4 previous readings whereas the Factory Orders also registered 1.0% growth compared to 0.7% expected and 0.3% prior. Further, S&P Global Composite PMI improved to 46.4 versus 46.3 initial estimations while the Services counterpart rose to 46.2 compared to 46.1 flash forecasts.

It should be noted that the US Nonfarm Payrolls (NFP) surprised markets by rising to 263K versus 200K expected and an upwardly revised prior of 284K while the Unemployment Rate matched market forecasts and prior readings of 3.7% for November. Following the upbeat data, Chicago Fed President Charles Evans said, "We are probably going to have a slightly higher peak to Fed policy rate even as we slow pace of rate hikes.”

At home, the Europen Central Bank board members François Villeroy de Galhau and Gabriel Makhlouf both favored a 50 basis point hike to the benchmark rate on December 15. Further, ECB board member and Bank of Portugal Governor Mario Centeno said on Monday that the inflation peak may be reached in the fourth quarter of this year. On the contrary, France's Finance Minister Bruno Le Maire said that the “inflation peak is not yet over, will last for some months.” Additionally, ECB Vice-President Luis de Guindos mentioned that the central bank needs to avoid "M-shaped evolution of inflation". The policymaker also stated that the economic deceleration is not as deep as expected.

While portraying the mood, S&P 500 Futures print 0.20% intraday gains around 4,011 while snapping a three-day downtrend. That said, the US 10-year Treasury bond yields fade the bounce off an 11-week low marked the last Friday, down three basis points (bps) to 3.56% by the press time.

Looking forward, German Factory Orders for October precede the US Goods Trade Balance for the said month to populate the economic calendar. However, major moves aren’t expected amid the pre-Fed blackout of policymakers.

Technical analysis

EUR/USD remains sidelined unless breaking the area comprising the one-week-old previous support line near 1.0550 and three-week-long horizontal support area surrounding 1.0480.