EUR/USD recovery needs validation from German Inflation, Fed comments

• EUR/USD picks up bids to reverse two-day downtrend amid market’s cautious optimism.
• Retreat in China’s covid infections from record high, efforts to revive real-estate sector improved sentiment.
• Hawkish comments from the Fed, ECB policymakers test the pair buyers ahead of the key data/events.
• German HICP precedes Eurozone inflation to offer early signal, US CB Consumer Confidence will also be important for fresh impulse.

EUR/USD rises half a percent as buyers approach the 1.0400 threshold heading into Tuesday’s European session. In doing so, the major currency pair prints the first daily gains in three ahead of the key German inflation gauge, namely the Harmonized Index of Consumer Prices (HICP) for November, as well as the US Confederation Board’s (CB) Consumer Confidence for the said month.

The quote’s latest run-up could be linked to the easing of China-linked fears and softer US Treasury yields, as well as mixed comments from the US and the European monetary policy authorities.

China’s daily covid infections dropped from an all-time high of 40,347 to 38,645, as per the latest official readings conveyed by Reuters. This also joins the upbeat performance of Chinese equities as the national securities regulator lifted a ban on equity refinancing for listed property firms, per Reuters. “The China Securities Regulatory Commission (CSRC) said late on Monday it would broaden equity financing channels, including private share placements for China and Hong Kong-listed Chinese developers, lifting a ban that has been in place for years,” mentioned the news.

On the other hand, European Central Bank (ECB) President Christine Lagarde mentioned on Monday that the economy is set to weaken for the rest of year and start 2023. ECB’s Lagarde further added that interest rates will remain their main tool for fighting inflation. On the same line were comments from ECB policymaker and Slovak central bank President Peter Kazimir who said, the “risk of recession in the Eurozone is growing.” Further, ECB Governing Council member Klaas Knot stated, “recession not a foregone conclusion.” Additionally, ECB policymaker Pablo Hernandez de Cos mentioned that the (rate) hikes so far (are) not enough to return inflation to goal.

Federal Reserve (Fed) officials were also active and tried suggesting the next moves of the US central bank, while also probing the EUR/USD moves.

Richmond Federal Reserve Bank President Thomas Barkin recently mentioned that he supports smaller interest-rate hikes ahead as the central bank moves to bring down too-high inflation. Previously, Cleveland Fed President Loretta Mester marked the need to see several more good inflation reports and more signs of moderation to back the pause in rate hikes.

Also, St. Louis Fed President James "Jim" Bullard stated that the situation calls for much higher interest rates than what we've been used to. Further, New York Federal Reserve Bank President John Williams said that he believes the Fed will need to raise rates to a level sufficiently restrictive to push down on inflation and keep them there for all of next year. Additionally, Fed Vice Chair Lael Brainard advocated for tighter monetary policy while citing risk-management reasons.

While portraying the mood, the US stock futures and equities in the Asia-Pacific region print mild gains despite the downbeat performance of Wall Street. Further, the US 10-year Treasury yields remain depressed near 3.69% by the press time and weigh on the US Dollar amid the risk-on mood.

Moving on, the first readings of German HICP for November, expected 11.3% YoY versus 11.6%, could challenge the EUR/USD buyers if posting a softer outcome, which is less likely. However, an anticipated deterioration in the US consumer sentiment gauge might help the pair buyers to remain hopeful ahead of Wednesday’s Eurozone HICP and a speech from Fed Chair Jerome Powell.

Technical analysis

Unless crossing a three-week-old previous support line, currently around 1.0410, the EUR/USD pair’s recovery remains elusive.