EUR/USD clings to mild gains below 1.0800 as ECB hawks battle with Fed doves ahead of US inflation

• EUR/USD prints five-day uptrend as bulls keep the reins at the highest levels since mid-2022.
• ECB policymakers continue suggesting needs for higher rates but Fed talks appear to lose hawkish bias of late.
• Risk-on mood, hopes of softer US inflation adds strength to upside momentum.

EUR/USD holds onto bullish bias around the 1.0770-80 region, the highest since May 2022, as markets await the all-important US inflation data on early Thursday.

That said, downbeat expectations from the US Consumer Price Index (CPI) for December join recently dovish comments from the Fed policymakers to keep the pair buyers hopeful ahead of the release. Adding strength to the upside bias are the hawkish comments from the European Central Bank (ECB) policymakers.

On Wednesday, ECB policymaker Robert Holzmann stated that rates will have to rise significantly further to reach levels that are sufficiently restrictive to ensure a timely return of inflation to target. On the same line, the ECB Governing Council member and French central bank governor Francois Villeroy de Galhau said, “ECB should aim to reach the terminal rate by the summer.” Furthermore, ECB member Olli Rehn said that rates in the Euro Zone will still have to rise significantly in the next couple of meetings and reach restrictive levels to dampen inflation.  

On the other hand, Federal Reserve Bank of Boston President Susan Collins backed the smaller rate increases while stating that she leans at this stage to a 25 bps hike. The policy, however, also mentioned that it is very data-dependent. Earlier in the week, Fed Chair Jerome Powell hesitated in conveying monetary policy outlook and raised hopes of a policy pivot.

It should be noted that China’s total reopening and early signals of heavy holiday shopping join the chatters that the People’s Bank of China (PBOC) will adhere to rate cuts in 2023 to spread the Beijing-inspired optimism and exert downside pressure on the US Dollar.

Also weighing on the greenback could be the downbeat Treasury bond yields as the US 10-year Treasury yields dropped two basis points (bps) to 3.53% while the US two-year bond coupons also traced the 10-year counterpart and print mild losses at around 4.21% at the latest.

Looking forward, a light calendar ahead of the US CPI data can keep the EUR/USD pair firmer without much noise. However, a surprisingly strong print of US inflation data could justify the Federal Reserve’s (Fed) hesitance in letting the doves in and can trigger the much-awaited pullback of the major currency pair.

Technical analysis

A successful break of a descending trend line from December 15, 2022, around 1.0685 by the press time, joins the looming bull cross on the MACD to keep buyers hopeful. However, the RSI (14) line is near the overbought conditions and suggests limited upside room for the pair. That said, the May 2022 peak of 1.0786 and the March 2022 bottom surrounding 1.0805 become crucial resistances to watch during the EUR/USD pair’s further upside.