EUR/USD fends off test of 1.1300 level, back to eyeing weekly highs above 1.1340 on eve of Christmas Eve

• EUR/USD has fended off an earlier test of the 1.1300 level and is back to trading in the 1.1330s.
• The pair is eyeing a test of weekly highs just above 1.1340, though trade on Friday will be subdued.

It’s been a choppier session than some might have expected on the eve of Christmas eve. Having dipped to sub-1.1300 levels at one point earlier on during US trading hours, EUR/USD has now recovered back to the 1.1330s and is eyeing a test of weekly highs just to the north of 1.1340. The drop under 1.1300 was likely spurred by the release of a batch of broadly strong US data at 1330GMT.

To recap quickly; the November Core PCE report was hotter than expected at 4.7%, Durable Goods Orders saw solid MoM growth November and Personal Income and Spending both saw healthy MoM gains (though were slightly negative when adjusted for inflation). Meanwhile, the latest weekly jobless claims report showed initial claims remaining close to 200K, a level consistent with full employment. Thursday’s strong data came on the back of a stronger than expected Consumer Confidence release for December on Wednesday.

At current levels, the EUR/USD trades broadly flat on the day and conditions are likely to be subdued on Friday given expectations for very low market volumes and a complete lack of any notable data releases. But FX strategists are warning that this week’s dollar weakness, which saw EUR/USD rally above 1.1300 from earlier lows under 1.1250, may ultimately prove short-lived. The Fed’s hawkish pivot in December has opened the door for a potential rate hike in March, which leaves the Fed on course to outpace the ECB when it comes to monetary normalisation by a significant margin.

This means the dollar could well resume its gradual upwards march during Q1 2022. That would be bad news for EUR/USD bulls. In the meantime and until the end of 2022, a break out of recent 1.1240-1.1360ish ranges for the pair seems unlikely. If EUR/USD can push above recent monthly highs (a few other G10/USD pairs have managed it in recent days), then a test of 1.1400 would be on the cards. But it will be difficult for the pair to sustain any such rallies, given the above.