EUR/USD defends 1.1300 as US dollar resists tracking firmer yields

• EUR/USD consolidates the biggest daily loss in two weeks, snaps three-day downtrend with mild gains.
• US Treasury yields keep Fed hawks hopeful ahead of next week’s FOMC, underpinning USD.
• ECBSpeak adds to trading barriers amid sluggish session, mixed sentiment.
• German inflation data, US housing numbers will decorate calendar but bond moves, risk catalysts are the key for fresh impulse.

EUR/USD licks its wounds past 1.1300 after strong US Treasury yields caused the heaviest daily fall in a fortnight. That said, the major currency pair gains 0.10% intraday near 1.1330, rising for the first time in four days by the press time of the pre-European session on Wednesday.

The latest corrective pullback could be linked to the US dollar’s hesitance to track the firmer Treasury at a multi-month high.

That said, the US Dollar Index (DXY) refreshes intraday low near 95.70 while easing from the weekly top. On the other hand, the US 10-year Treasury yields added 1.5 basis points (bps) to 1.88% after refreshing the two-year top to 1.89% during the early Asian session. Coupons of the other key US bond variants, like 2-year and 5-year, also renewed multi-day peaks during the early Asian session during the four-day uptrend before recently grinding higher.

It’s worth noting that the softer US data and slightly hawkish comments from the ECB policymaker, published the previous day, can be cited for the pair’s latest rebound.

The NY Empire State Manufacturing Index slumped to negative for the first time in two years in December, -0.7 versus 25.7 expected and 31.9 prior, whereas US NAHB Housing Market Index eased to 83 versus 84 market forecasts and previous readouts.

On the other hand, France's central bank head and ECB governing council member François Villeroy de Galhau reiterated on Tuesday that French inflation is likely to fall back under 2.0% by the end of 2022. However, should inflationary pressures prove more persistent, he added, he has no doubt that the ECB would adapt its monetary policy faster. 

While reacting to the aforementioned catalysts, EUR/USD pays a little heed to Reuters poll stating, “Eurozone inflation is set to burn hotter throughout 2022 than expected a month ago, which could pressure the European Central Bank to tighten policy once the Omicron wave of the pandemic passes.”

Amid these plays, stock futures in the US and Eurozone remain offered and market sentiment stays sluggish in search for fresh clues.

As a result, the second reading of the German Harmonized Index of Consumer Price (HICP) for December, expected to confirm 5.7% YoY initial forecasts, will be important. Following that, the US Housing Starts and Building Permits for the stated month should be eyed carefully for clear direction.

Above all, the Treasury yields and covid updates are crucial ahead of next week’s Federal Open Market Committee (FOMC) verdict.

Technical analysis

The EUR/USD pair’s slump on Tuesday dragged MACD towards teasing the bears while breaking a two-month-long resistance-turned-support area of around 1.1380-85. However, the 50-DMA level surrounding 1.1325 restricts immediate declines ahead of an upward sloping support line from late November, close to 1.1300 at the latest.

On the contrary, corrective pullback remains elusive below the horizontal area from November 16, near 1.1380-85.