EUR/USD dips back towards 1.1300 after hitting resistance at key downtrend as US inflation, ECB & Fed meetings loom

• EUR/USD has been ebbing lower on Thursday, though still trades to the north of 1.1300.
• The pair rejected a test of a key long-term downtrend, with markets in wait-and-see mode ahead of key upcoming events.

After its impressive run higher on Wednesday, which was at the time triggered by short-term technical buying as after cross broke above a short-term downtrend, EUR/USD faltered at 1.1350 and has, ever since, been ebbing lower. The pair on Thursday is still trading to the north of the 1.1300 level for now, but has in recent trade dipped under its 21-day moving average again (which resides at 1.1317).

It appears that, ahead of key US inflation data later in the week and next week’s Fed and ECB monetary policy meetings, traders lacked the conviction to send EUR/USD back to the north of a key long-term downtrend. For reference, in mid-November, EUR/USD broke below a downwards trendline that had been supporting the price action all the way back to June. Since then, it has failed twice to break back above this downtrend.

A break above this downtrend would likely signal a shift in EUR/USD’s near-term momentum and a push towards the 1.1400s area to 1.1500 level, but traders and analysts seemingly remain unconvinced that the fundamental backdrop warrants such a move. At the very least, the rejection of the key downtrend suggests that markets want to wait and see what happens with the upcoming key Fed and ECB events.

The Fed is unanimously expected to announce an accelerated pace of QE taper as of January, as Chair Jerome Powell hinted last week. If US inflation data this Friday comes out above 7.0%, this will up pressure on the bank to be hawkish, and there are already some outside calls that the bank may start hiking as soon as March, though this is not what markets are currently pricing.

In terms of the ECB next week, it's all about what the bank will do with its pre-pandemic APP to make up for the sudden drop off in monthly QE purchases when the PEPP ends in March. Various ECB sources this morning told the financial press that the bank is converging on a view to increasing APP purchases from March, though in a limited and ideally flexible manner. Meanwhile, separate sources said the ECB might tweak its PEPP reinvestment guidance – reinvestments currently run to the end of 2023. These comments didn’t have any impact on EUR/USD.

Ahead, aside from the release of US weekly jobless claims figures at 1330GMT, it's set to be a quiet day calendarwise. That means Omicron-related headlines will likely continue to dictate the action, from a macro-perspective, at least.