EUR/USD continues to hover above 1.1300 in defiance of calls for USD strength post-hawkish Fed minutes

• EUR/USD is precariously hovering above the 1.1300 level, as analysts/traders call for dollar strength in wake of hawkish Fed minutes.
• Bears will be looking for a test of recent lows around 1.2775 if the 21DMA and 1.1300 level is broken.
• For now, strong Eurozone data and hawkish ECB bets are aiding the euro.

EUR/USD is precariously hovering to the north of the 1.1300 level, as the bulls, for now, fend off calls from analysts and traders alike that the dollar should strengthen in wake of the latest more hawkish than anticipated Fed minutes. Markets were particularly taken aback by the degree to which FOMC members agreed on the need to press ahead promptly with reducing the size of the Fed’s balance sheet as the rate hiking cycle gets underway. Whilst the minutes sent US bond yields across the curve shooting higher and triggered a tumble in global equities (with the losses concentrated mostly in tech), FX markets are yet to join the hawkish Fed move.

At current levels around 1.1310, EUR/USD trades flat on the day. Bears will be eyeing a test of recent lows in the 1.2775 area, as well as a break below an uptrend that has loosely been supporting the price action going all the way back to November. Before breaking out to the low 1.1200s, however, the pair is going to need to break below its 21-day moving average at 1.1307 and below the key 1.1300 figure. To the upside, key resistance is in the 1.1380 area.

Euro holding off dollar advances for now

Strong Eurozone data and the fact that euro Short-Term Interest Rate markets have aggressively pulled forward expectations for the first ECB rate hike could be helping the euro. On the former, German Factory Orders surged 3.7% in November, which comes as a boost to Germany’s important manufacturing sector that has continued to struggle with supply chain snags and skills shortages in recent months. Meanwhile, individual German states have been reporting inflation data throughout the session and generally now point to the likelihood that national HICP inflation rose (unexpectedly) in December. The German flash estimate is out at 1300GMT.

Regarding money market pricing for the ECB, a 10bps rate hike is now seen as soon as October, as European money markets shift hawkishly in tandem with US money markets, which now price an 80% chance of March Fed lift-off. “There is still a sense that (euro area) inflation could surprise to the upside for longer than expected, so markets have to position for the view that the ECB could capitulate and move earlier on rates” noted analysts at Mizuho. Whether all of the above will continue to be enough to shield the euro from the US dollar’s Fed fuelled advances is another question.

“The discussion about quantitative tightening in the minutes is very significant” analysts at ING noted. “First and foremost, it shows the magnitude of the Fed’s change of tone as they contemplate a more aggressive balance sheet reduction in parallel to hikes” they add, with analysts at MUFG concluding that the “overall the hawkish tone of the minutes support our outlook for further US dollar strength at the start of this year”. Analysts at RBC agree, noting that “the combination of equity risk-off while yields continue to rise would be an interesting one if it endures, and should be broadly supportive of the US dollar”.