EUR/USD lurches above 1.0500 on hawkish ECB commentary, now eyes test of 21DMA

Whilst remarks from arch ECB hawk Klaas Knot, who said the bank shouldn’t rule out a 50 bps rate hike if the data warrants it, were the catalyst to launch EUR/USD above the 1.0500 level, multiple other factors had already been working in the pair’s favour throughout the European morning. Broad USD profit-taking as a result of improved macro risk appetite on constructive Covid-19 and big tech crackdown updates out of China, plus much stronger than anticipated UK labour market data which have eased concerns about UK economic weakness saw EUR/USD rally from the low 1.0400s to the upper 1.0400s by midway through the European morning.

Solid Eurozone economic data (the first estimate of Q1 GDP growth beat expectations while Q1 employment change was robust) has probably also helped the pair on Tuesday. At current levels in the 1.0530s, EUR/USD on-the-day gains now stand at around to 1.0%, with the pair now trading about 1.7% above last week’s multi-year mid-1.0300 lows. The pair is now eyeing a test of its 21-Day Moving Average in the 1.0580s, but traders should be cautious not to get over-excited about the most recent rebound ahead of key stateside risk events.

The US is set to release April Retail Sales figures at 1230GMT, while the rest of the day will be packed with Fed speak. The most notable speaker is Fed Chair Jerome Powell, who is scheduled to appear at 1800GMT. Powell and other Fed policymakers (except perhaps the hawkish outlier James Bullard) are expected to stick to the script; i.e. rapid Fed policy tightening is needed and appropriate given the high inflation backdrop, with rates likely to return to neutral (around 2.5%) by the end of the year.

That means perhaps another three consecutive 50 bps rate hikes at upcoming Fed meetings after the 50 bps rate hike implemented earlier this month. The final of those 50 bps rate hikes isn’t fully priced in and FX markets will probably be sensitive to Powell’s tone in the context of how it impacts the likelihood of another two or three 50 bps moves. EUR/USD may yet slide back under 1.0500. However, in the absence of a hawkish surprise, all other signs point to EUR/USD testing its 21DMA over the next few days.