EUR/USD approaches 1.1300 amid USD pullback ahead of Fed

• EUR/USD picks up bids to refresh intraday top, snaps two-day declines to bounce off weekly low.
• More reasons for ECB than Fed to disappoint hawks, Omicron, is the key.
• US Retail Sales, stimulus hopes and geopolitics add to the watcher’s list.

EUR/USD consolidates weekly losses around 1.1270, up 0.15% on a day heading into Wednesday’s European session.

The major currency pair dropped during the previous two days before bouncing off a short-term ascending triangle’s support as markets await the US Federal Reserve’s (Fed) verdict, also the European Central Bank (ECB) monetary policy decision.

Indecision ahead of the Fed’s anticipated action seems to underpin the latest consolidation of the EUR/USD prices. On the same line was news that the US House passed a bill to raise the debt limit, as well as President Joe Biden’s optimism over getting his Build Back Better (BBB) plan through the House in 2021.

Fed v/s ECB

Although markets seem loud and clear over the Fed’s tapering and rate hike expectations, a hidden bullish consensus for the ECB makes the case interesting for the EUR/USD pair traders.

A drop in the US inflation expectations, as measured by the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, to 11-week low contrast with a record high Producer Price Index (PPI) for November to test Fed hawks. On the same line is the return of the virus-linked activity restrictions, mainly due to the Omicron spread. However, a four-decade high US Consumer Price Index (CPI) and record top of the Producers Price Index (PPI) propels the US central bank to tame the price pressure.

On the other hand, a virus outbreak is up for replacing the Pandemic Emergency Purchase Program (PEPP). Currently, the ECB’s quantitative easing program buys around €80 billion per month of bonds, out of which €20 billion are via the Asset Purchase Programme (APP). Market speculations increase that the APP will be extended beyond the March 2021 likely expiry of the PEPP.

Behind moves are the multiple comments from the ECB policymakers, including President Christine Lagarde, who sees lower inflation going forward. Additionally, comparatively worse covid conditions in Europe than the US joins Brexit fears to stop the regional bank from monetary policy tightening.

That said, the Fed is up for doubling the monthly bond purchase and could end it soon to announce a rate hike in 2022.

Read: Fed Interest Rate Decision Preview: Can the FOMC satisfy and mollify the markets?

Ahead of the Federal Open Market Committee (FOMC), the US Retail Sales for November, expected 0.8% YoY versus 1.7% prior, will act as the last catalyst for the Fed policymakers to consider before heading into the end of bond purchases and rate hikes.

“Because the Federal Open Market Committee (FOMC) announcement is less than six hours later, the sales figures are not likely to excite trading. Markets will want to see what the governors do before committing to action, but the complexion of sales could add or detract from the market reaction to the expected taper. A good retail report will provide confidence that the economy can tolerate higher rates and a weak report bringing that idea into question,” said FXStreet’s Joseph Trevisani.

Also read: US Retail Sales November Preview: The Fed looks to the consumer

Technical analysis

The bearish MACD signals and the major currency pair’s double top formation around 1.1330, not to forget the lower highs portrayed since November 30, favor the EUR/USD bears to conquer the 1.1250 immediate support, also the lowest line of a short-term ascending triangle. Following that, the 1.1200 threshold and the yearly low of 1.1186 may become imminent for the pair sellers before targeting the 61.8% Fibonacci Expansion (FE) level of October 28 to November moves, near 1.1120. Meanwhile, an upside clearance of the 1.1330 immediate hurdle will direct EUR/USD prices towards the 1.1375-87 region comprising 200-SMA, also the upper-end of the stated triangle.