EUR/USD rebounds sharply and retests the 1.0850 zone

• EUR/USD resumes the uptrend and retakes 1.0800 and beyond.
• Final inflation figures in the euro area take centre stage on Wednesday.
• Retail Sales, Producer Prices take centre stage across the pond.

The European currency regains part of its shine and encourages EUR/USD to reclaim the area north of 1.0800 the figure midweek.

EUR/USD focuses on EMU, US data

After three consecutive daily pullbacks, EUR/USD finally regains the smile and returns to the area past the 1.0800 hurdle on Wednesday.

The improvement in the pair comes pari passu with the equally rising optimism in the risk complex and the renewed offered stance in the greenback despite the sharp depreciation of the Japanese yen vs. the latter.

Earlier in the session, New Car Registrations in the euro area expanded 12.8% in the year to December, while the final inflation figures measured by the CPI in the bloc are due later.

In the NA session, the main attraction will be the publication of Retail Sales and Producer Prices seconded by weekly Mortgage Applications, the NAHB Index, Business Inventories, TIC Flows and the Fed’s Beige Book.

In addition, speeches by FOMC’s Bostic, Bullard, Harker and Logan will also be in the limelight.

What to look for around EUR

EUR/USD bounces off recent lows in the 1.0770/65 band and manages to regain the 1.0800 mark and beyond amidst the strong improvement in the sentiment around the risk-associated universe.

Price action around the European currency should continue to closely follow dollar dynamics, as well as the impact of the energy crisis on the euro bloc and the Fed-ECB divergence.

Back to the euro area, the increasing speculation of a potential recession in the bloc emerges as an important domestic headwind facing the euro in the short-term horizon.

Key events in the euro area this week: EMU New Car Registrations / Final Inflation Rate (Wednesday) – ECB Lagarde, ECB Accounts (Thursday) - ECB Lagarde (Friday).

Eminent issues on the back boiler: Continuation of the ECB hiking cycle amidst diminishing probability of a recession in the region. Impact of the war in Ukraine and the protracted energy crisis on the bloc’s growth prospects and inflation outlook. Risks of inflation becoming entrenched.

EUR/USD levels to watch

So far, the pair is gaining 0.49% at 1.0838 and faces the next up barrier at 1.0874 (monthly high January 16) followed by 1.0900 (round level) and finally 1.0936 (weekly high April 21 2022). On the flip side, the breakdown of 1.0776 (weekly low January 17) would target 1.0481 (monthly low January 6) en route to 1.0443 (weekly low December 7).