EUR/USD aims to build a cushion above 1.0450, US data trigger Fed’s rate peak chaos

EUR/USD is displaying topsy-turvy moves after dropping to near 1.0460 in the early European session. The major currency pair is oscillating in a range of 1.0456-1.0476 after an intense sell-off in the late New York session. Earlier, the Euro asset witnessed a steep fall after a breakdown of the broad consolidation formed in a 1.0476-1.0533 range.

Renewed strength in the United States economy after upbeat economic data has propelled pessimism for risk-sensitive assets. Meanwhile, the US Dollar Index (DXY) has turned sideways around 105.60 after an open rejection-reverse move in early Asia. S&P500 futures are attempting hard to regain traction but a solid risk-averse theme is fading signs of recovery. The 10-year US Treasury yields are attempting firm to extend gains above 3.55%.

US data-inspired optimism unlocks inflation barriers

For the past year, the Federal Reserve (Fed) is working day and night to contain mounting inflation. Federal Reserve chair Jerome Powell announced a balance sheet reduction and escalated interest rates at a significant pace to bring a slowdown in inflation. However, synergy generated by the hot labor market and stellar demand in the service sector has displayed signs of sheer strength in the United States economy.

Strength in an economy is a significant filter for accelerating inflation in an economy. To augment the tight labor market and upbeat demand in service sectors, firms will get forced to continue the recruitment process. Also, a tight labor market will be delighted with higher earnings, which may trigger retail demand ahead. It seems that the next opponent, which will present a tough fight in front of the Federal Reserve is the wage-inflation. Therefore, the interest rate peak in the United States economy is far from reach for now.

Federal Reserve’s higher interest rate peak supports recession

Odds are favoring a higher interest rate peak by the Federal Reserve rather than the continuation of the current interest rate hike pace to offset fresh evidence of strength in the United States economy. There is no denying the fact that a higher neutral rate will weigh significantly on the inflationary pressures but will simultaneously lead to an economic crash.

Firms are still unhappy with accelerating interest rates and now higher guidance for a neutral rate will force them to call-off expansion plans. This may also push the economy into recession and the equities will face the heat again. It may also result in higher delinquency costs for commercial banks as households could miss payments of interest obligations due to higher interest rates.

European Central Bank policymakers expected interest rate to peak sooner

Eurozone inflation has displayed signs of exhaustion in its preliminary November report led by higher unemployment and interest rates by the European Central Bank (ECB). Also, monthly Retail Sales data contracted by 1.8% while expectations were aiming for a 1.7% contraction this week. And, annual Retail Sales contracted 2.7% against the consensus of 2.6% contraction. Ceteris Paribus, a decline in consumer spending is hinting that inflation will fell under the control.

In response to that, European Central Bank policymakers believe that the central bank will continue to hike interest rates but the neutral rate is not so far from here, which is impacting the Euro.

ECB Chief Economist Phillip Lane is dubious about the inflation peak as it has been achieved or still to come next year. He further added that he expects more rate hikes ahead but "a lot has been done already".

While, Constantinos Herodotou, Governor of the Central Bank of Cyprus said that “There will be another hike in rates, but we are very near neutral rate.”

Going forward, the speech from European Central Bank President Christine Lagarde will be of utmost importance, which is scheduled for Thursday.

EUR/USD technical outlook

EUR/USD is declining towards the upward-sloping trendline placed from November 3 low at 0.9730. The major currency pair has dropped below the 20-period Exponential Moving Average (EMA) at 1.0487 while the 50-EMA at 1.0451 is still untouched.

The Relative Strength Index (RSI) (14) has shifted into the 40.00-60.00 range, which indicates a consolidation ahead.