EUR/USD slides back under 1.1250 as markets digest latest US data/Fed speak ahead of ECB meeting

• EUR/USD has eased back under 1.1250 from earlier highs in the 1.1270s, having rejected resistance.
• FX markets are digesting the latest Eurozone and US data releases and Fed speak.
• After upside Eurozone inflation surprises, some analysts have been flagging a risk of a more hawkish ECB on Thursday.

After rejecting resistance in the 1.1270s and reversing back from session highs to underneath the 1.1250 level, it looks as though the EUR/USD bears are making a comeback. Having been as much as 0.4% higher earlier in the session, EUR/USD is back to trading flat in the 1.1240 area, as traders continue to digest the latest Eurozone and US data releases and Fed speak. Recently released US ISM manufacturing PMI survey data for January showed manufacturing activity growth at its weakest since November 2020, with pandemic-related problems such as labour shortages and supply chain holdups worsening last month with the spread of Omicron.

Stronger than expected December JOLTs data showed job openings rising back towards 11M in December, however, seemingly negative any negative impact the ISM survey might have had on the buck. Net-net, Tuesday’s US data has not changed the narrative surrounding the US economy right now; that it is experiencing temporary Omicron-related weakness and that labour markets remain very tigth and inflationary pressures very high. With Tuesday’s data dump out of the way, FX markets turn their focus to the ADP national employment change estimate on Tuesday, ahead of the ISM Services report on Thursday and the official jobs report on Friday.

As usual, the Friday jobs report will be the most important data of the week; the headline NFP number is expected to be weak with Omicron slowing labour market churn. Fed policymakers have this week flagging wage growth and measures of labour market slack as the more important metrics to keep an eye on. Speaking of Fed speak, the message from policymakers this week has been consistent; a March rate hike enjoys wide support, but there is less certainty about the pace of tightening for the rest of 2022. Fed members have expressed a desire to maintain optionality to go slower or faster depending on economic developments and most said a 50bps move in March was possible, but not the expected scenario.

While Fed speak, US data and how these impact Fed tightening expectations will continue to be a key driver of EUR/USD for the remainder of the week, traders should not ignore Eurozone fundamentals. After upside inflation surprises from France, Germany and Spain this week (implying an upside surprise in the Eurozone aggregative inflation figures on Wednesday), some analysts have been flagging a risk of a more hawkish ECB on Thursday. Eurozone money markets were pricing an 80% chance of a 25bps rate hike from the bank as soon as October. Any hint towards the conditions for a rate hike being met in 2022 could light a fire under EUR/USD and send it back towards the 1.1300s.