EUR/USD pivots 1.1350 area, unreactive to latest ECB minutes which contain few new surprises

• EUR/USD did not react to the latest ECB minutes release which contained few new surprises.
• The pair continues to pivot the 1.1350 area as analysts warn central bank divergence could yet send it lower.
• The uptrend that has supported the price action since late November is a key level to watch.

The latest ECB minutes release contained little by way of surprises or new revelations that recent “sources” hadn’t already leaked to the press, hence the lack of any notable EUR/USD reaction. The pair thus continues to pivot the 1.1350 area and at current levels in the 1.1330s, trades flat on the session. In wake of the minutes, the consensus analyst view very much remains that the ECB currently does not see the conditions for rate hikes in 2022, or indeed in its forecast horizon, having been met. However, the bank is clearly wary of upside inflation risks (a major source of dissenting votes at the last meeting) and, as a result, is ready to pivot hawkishly and in a data-dependent manner if upside risks manifest.

Recent inflation data suggests this upside scenario is becoming ever more possible. German producer prices grew at a pace of 24.2% in December, well above expectations for 19.4% and at a fresh record high. Meanwhile, the final estimate of Eurozone December Consumer Price Inflation confirmed last month’s rise to 5.0% (also a record high for the Eurozone). But even if the upside inflation scenarios manifest, not many analysts expect the ECB to live up to already very hawkish money market pricing, which currently imply rate hikes starting as soon as October. Given that the Fed is very likely to live up to or perhaps even exceed money market expectations for four rate hikes in 2022, the theme of central bank divergence is likely to continue to weigh on EUR/USD in 2022.

US data in the form of weekly jobless claims, the January Philly Fed manufacturing survey and more housing figures likely won’t shift the macro narrative driving currencies much given the proximity to next week’s Fed meeting. But strong data may encourage further EUR/USD selling, with the pair already about 0.7% lower on the week. The main support levels to watch are the weekly lows just under 1.1320 and the 50-day moving average at 1.1321. Then there is the uptrend which has been supporting the price action going all the way back to late November. Should that break, that would open the door to technical selling that could eventually send EUR/USD all the way back to the 2021 lows under 1.1200.