EUR/USD grinds higher past 1.1000 as ECB has a tough task to defend Fed-inspired gains

• EUR/USD clings to mild gains around 10-month high amid sluggish markets.
• Fed’s dovish hike pleased US Dollar bears as slowing inflation, rate cuts were uttered.
• ECB needs to push back slower rate hike concerns to justify 50 bps rate hike,
• Softer EU inflation, German data raise difficulty for ECB’s Lagarde to defend Euro bulls.

EUR/USD seesaws around the highest levels since April 2022, mildly bid near 1.1020 during a three-day uptrend, as pair traders wait for fresh clues ahead of the all-important European Central Bank (ECB) monetary policy meeting. In doing so, the major currency pair defends Federal Reserve (Fed) induced gains as market sentiment remains cautiously optimistic.

The Fed drowned the US Dollar with its dovish hike of 0.25%, which was widely expected and priced in. The major attention, however, was given to the Fed statement suggesting the receding inflation pressure and Chairman Jerome Powell’s hints of rate cuts during late 2023 if inflation drops faster. Additionally favoring the EUR/USD bulls were downbeat US data and hopes of more stimulus from China, not to forget upbeat equities and softer US Treasury bond yields.

Among the key US data, the softer prints of the US ISM Manufacturing PMI and ADP Employment Change gained major attention and weighed on the greenback before the super-duper Fed moves.

On the other hand, the Euro Area Harmonised Index of Consumer Prices (HICP) dropped to 8.5% YoY versus 9.0% expected and 9.5% prior while the Core HICP reprinted 5.2% YoY number compared to 5.1% market forecasts. It’s worth noting that Germany’s Gross Domestic Product (GDP) for the fourth quarter (Q4) and the latest Retail Sales raised a challenge for the ECB hawks as both these data suggest the need for easy money for the bloc’s powerhouse. Also challenging the old continent’s economics are the geopolitical tussles with Russia and internal tension surrounding the bloc’s statutory economic norms and oil price caps.

Against this backdrop, Wall Street rallied and the US 10-year Treasury yields slumped the most in two weeks while testing the lowest levels in a fortnight. On the same line were the US two-year Treasury bond coupons which poke 4.11% level at the latest. It should be observed that the US 10-year yields lick their wounds near 3.41% while the S&P 500 Futures print mild gains around the highest levels since August 2022, tested the previous day, by the press time.

To sum up, EUR/USD is likely to remain firmer as the ECB is up for 0.50% rate hike and the Fed matched market forecasts of taking a dovish move. However, the major currency pair’s ability to reject the pullback relies on how well ECB President Christine Lagarde defends the further rate hikes.

Other than the ECB, US Factory Orders for December, expected 2.3% versus -1.8% prior and the US Preliminary Nonfarm Productivity for the fourth quarter (Q4), expected 2.4% versus 0.8% prior. Above all, Friday’s US jobs report for January will be crucial to follow for clear directions.

Technical analysis

EUR/USD remains on the way to March 2022 peak surrounding 1.1185 unless breaking a seven-week high ascending trend line, close to 1.0960 by the press time.