EUR/USD turns negative below 1.0700 on USD recovery

• EUR/USD now adds to Wednesday’s decline below 1.0700.
• Fed’s L.Mester stressed inflation risks remain on the upside.
• US Producer Prices rose more than estimated in January.

Another data-led rebound in the greenback puts EUR/USD under fresh pressure and drag it to the sub-1.0700 region on Thursday.

EUR/USD weak on USD bounce

EUR/USD now extends the selling pressure seen in the previous session in response to another bullish attempt in the greenback, this time following results from the US docket and hawkish remarks from Fed’s L.Mester (2024 voter, hawk).

Indeed, the pair revisited the area below 1.0700 the figure after US Producer Price rose more than expected a monthly 0.7% in January and 6.0% from a year earlier. Still on the strong side, weekly Initial Claims increased by 194K in the week to February 11, showing once again the persistent good health of the labour market.

On the not-so-bright side, Building Permits expanded at a monthly 0.1% in January - or 1.339M units - Housing Starts shrank 4.5% MoM - or 1.309M units - and the Philly Fed Manufacturing Index disappointed everybody after declining to -24.3 for the current month.

Earlier in the session, ECB’s F.Panetta suggested inflation in the region could drop below the 3% at some point towards the end of the year, while he also warned against risks of over-tightening (seriously?).

From the Fed’s playground, Cleveland Fed and well-known hawk L.Mester (2024 voter) reiterated that inflation remains too high at the time when she noted that the current Fed’s tightening cycle should slow growth and increase unemployment. She also advocated for rates to climb above the 5% level and stay there for an extended period of time.

What to look for around EUR

Despite the recent rebound to the 1.0800 region, EUR/USD remains within the multi-day consolidative phase and decently supported near 1.0650 for the time being.

In the meantime, price action around the European currency should continue to closely follow dollar dynamics, as well as the potential next moves from the ECB after the bank has already anticipated another 50 bps rate raise at the March event.

Back to the euro area, recession concerns now appear to have dwindled, which at the same time remain an important driver sustaining the ongoing recovery in the single currency as well as the hawkish narrative from the ECB.

Eminent issues on the back boiler: Continuation of the ECB hiking cycle amidst dwindling bets for a recession in the region and still elevated inflation. Impact of the Russia-Ukraine war on the growth prospects and inflation outlook in the region. Risks of inflation becoming entrenched.

EUR/USD levels to watch

So far, the pair is retreating 0.13% at 1.0672 and a drop below 1.0655 (weekly low February 13) would target 1.0481 (2023 low January 6) en route to 1.0325 (200-day SMA). On the upside, the next up barrier aligns at 1.0804 (weekly high February 14) seconded by 1.1032 (2023 high February 2) and finally 1.1100 (round level).