EUR/USD rebounds to mid-1.0600s on ECB's hawkish rate hike, weaker US macro data

• EUR/USD trims a part of its intraday losses in reaction to the ECB’s hawkish 50 bps rate hike.
• Disappointing US macro data caps the attempted USD recovery and offers additional support.
• Traders now look to the ECB’s post-meeting press conference for some meaningful impetus.

The EUR/USD pair manages to recover a few pips from the daily low and climbs back above mid-1.0600s after the European Central Bank (ECB) announced its policy decision.

As was priced in the markets, the ECB delivered a 50 bps rate hike at the end of the December policy meeting this Thursday and indicated that it will raise borrowing costs further. In the accompanying policy statement, the central bank noted that inflation remains far too high and is projected to stay above the target for too long.

A more hawkish forward guidance, saying that rates will still have to rise significantly at a steady pace to ensure a timely return of the 2% inflation target, provides a modest lift to the shared currency. The upside for the EUR/USD pair, however, remains capped amid a goodish US Dollar recovery from a six-month low touched earlier this Thursday.

The Fed on Wednesday signalled that it will continue to raise rates to crush inflation. In fact, the so-called dot plot projected at least an additional 75 bps increase in borrowing costs by the end of 2023, lifting the terminal rate rising to 5.1%. This, along with a fresh wave of the global risk-aversion trade further benefits the safe-haven buck.

On the economic data front, the US monthly Retail Sales declined by 0.6% in November, down sharply from the 1.3% increase reported last month and missing estimates for a modest 0.1% fall. Adding to this, the Philly Fed Manufacturing Index also fell short of market expectations and tumbled to -11.2 for December from 4.5 in the previous month.

The data fueled speculations that the Fed will pivot from an ultra-hawkish stance to something more neutral. This is reinforced by depressed US Treasury bond yields depressed, which keep a lid on the attempted USD recovery and lends additional support to the EUR/USD pair. Traders now look to the post-ECB press conference for some meaningful impetus.

Technical levels to watch