EUR/USD grinds higher past 1.0700 as traders brace for EU Q4 GDP, US inflation

• EUR/USD bounces off 50-day EMA as US Dollar eases ahead of the key data.
• Risk sentiment improved on easing US-China fears despite “unidentified objects”.
• EC quarterly economic forecasts added strength to the Euro pair’s recovery.
• US inflation expectations hint at firmer print but Fed hawks need strong number to push back policy pivot talks.

EUR/USD holds onto the week-start gains from the five-week low around 1.0725-30 during early Tuesday morning in Asia. The major currency pair benefited from the improvement in market sentiment, as well as the broad Euro gains ahead of the key statistics from the Eurozone and the US.

The week began with a risk-off mood amid the US-China tensions surrounding the mystery objects that flew over their boundaries and allegations of spying. However, the US General turned down the fears while rejecting calls to believe that those flying objects were from China. Adding strength to the risk-on mood were upbeat US equities and data from the Eurozone, not to forget the market’s positioning ahead of the preliminary readings of the fourth quarter (Q4) Eurozone Gross Domestic Product (GDP) and the US Consumer Price Index (CPI) for January.

On Monday, the European Commission (EC) released its quarterly economic projections for the Eurozone wherein it revised up the economic growth forecast to 0.9% for 2023 from 0.3% previously expected, projecting 2024 growth unchanged at 1.5%. The EC, however, lowered the Eurozone inflation forecast for 2023 to 5.6% YoY from 6.1% earlier expected. Further, the EC also cut 2024 inflation predictions to 2.5% for 2024, versus 2.6% previously anticipated.

It should be noted, however, that the hopes of firmer European inflation contrasted with the mixed comments from the European Central Bank (ECB) officials to probe the EUR/USD bulls.

That said, according to economists polled by Bloomberg, Euro area inflation is still likely to loom above the European Central Bank (ECB) target of 2.0% heading further out in 2025.

Further, European Central Bank (ECB) Vice-President Luis de Guindos said on Monday, “Rate increases beyond March are to depend on data.” On the same line, ECB policymaker Mario Centeno said, “Inflation is going down faster than we expected,” while adding that smaller hikes would need mid-term inflation nearing 2%.

On the other hand, Fed Governor Michelle Bowman said on Monday that the Federal Reserve will need to continue to raise interest rates in order to get them to a level high enough to bring inflation back down to the central bank's target rate, per Reuters. Before him, Philadelphia Federal Reserve President Patrick Harker pushed back the chatters of a Fed rate cut during 2023. However, the policymaker did mention, “Fed not likely to cut this year but may be able to in 2024 if inflation starts ebbing.”  His comments were mostly in line with Fed Chair Jerome Powell’s cautious optimism and hence challenged the US Dollar buyers.

Against this backdrop, Wall Street closed with gains while the US Treasury bond yields snapped a two-day uptrend.

Moving on, EUR/USD might remain lackluster moves ahead of the key EU Q4 GDP and the US CPI for January as policymakers at the ECB and the Fed appeared to have eased their hawkish bias. As a result, softer prints of the data may weigh on the respectively, with higher odds in favor of the Euro’s pullback than the US Dollar considering the early signals for the inflation number. That said, the first reading of the Eurozone Q4 GDP is expected to repeat 1.9% YoY figures while the US CPI could ease to 6.2% YoY versus 6.5% prior.

Technical analysis

EUR/USD rebounds from the 50-day Exponential Moving Average (EMA), around 1.0675 by the press time, to portray the latest recovery from the five-week low. However, the 21-day EMA and the previous support line from early November 2022, respectively near 1.0770 and 1.0925, appears important resistances to crack for the bulls to retake control.