EUR/USD firming towards 1.1350 ahead of the key FOMC minutes

• EUR/USD is holding in a key area on the weekly chart, but is vulnerable to a breakout.
• The FOMC minutes will be important at the top of the hour as a key event ahead of NFPs.

At 1.1345 currently, EUR/USD is trading 0.5% higher between a range of 1.1270 and 1.1346 while the US dollar melts within the familiar sideways range as measured against a basket of major currencies in the DXY index. 

DXY is down for the first day this week and has broken below 96.  This week’s rally has run out of steam near 96.40, a key technical level. The dollar may struggle to get past there now before there can be a test of the December cycle high near 96.91.  This leaves the euro in good stead ahead of this week's main event in the Nonfarm Payrolls report. 

''The late-December COVID surge likely came too late to prevent a pickup in US payrolls after the gain in November (210k) appeared to be held down by an overly aggressive seasonal factor,'' analysts at TD Securities said. 

Fed minutes eyed

Meanwhile, the Federal Reserve minutes will shed some light on the path to interest rate hikes for this year. '' Since the Fed accelerated tapering at that December meeting, markets will be looking for clues for when the conditions for liftoff will likely be met,'' analysts at Brown Brothers Harriman explained. ''WIRP suggests nearly 2 in 3 odds of liftoff March 16, while May 4 is fully priced in. Some are looking for clues to balance sheet reduction, but we think it is way too early for that. That seems like a 2023 story and so Fed officials are unlikely to be discussing it just yet.''

Looking to Treasury yields, these have been climbing at the start of this year,  boosting the likelihood that the Federal Reserve will hike rates at least three times beginning in May to counteract price pressures. Today, the ten-year yield is higher by some 1.8% and is testing the November highs. A break of 1.7060% will be important and would be expected to fuel the US dollar. 

As for the euro, the European Central Bank won’t meet until February 3, which will allow the central bank to assess the economic outlook as more data comes out. This leaves the single currency vulnerable to the data, although not much is expected from the ECB as the bank has already tipped PEPP will end as scheduled in March.

''The temporary increase to its existing AP will not be large enough to prevent a significant tightening of financial conditions this year in the eurozone,'' analysts at BBH explained. ''Besides the impact on the growth outlook, this tapering will have unwanted side effects, with peripheral spreads likely to widen further.''

EUR/USD technical analysis

The W-formation is a regression pattern that leaves the price anchored towards the neckline. This comes in at around 1.1320. A break below this support area opens the risk of a downside continuation which could be significant if the price breaks the 1.12 areas as it exposes from all the way to a test of the 1.10 figure as follows:

The area of imbalance of price is where the price can slide on a break of the weekly lows.