EUR/USD retreats towards 1.0800 on hawkish Fed bets, hopes of no US default, focus on ECB’s Lagarde

• EUR/USD fades bounce off six-week low as US Dollar grinds higher at nearly two-month top.
• Softer EU inflation, downbeat tone of ECB’s de Cos weigh on Euro price.
• Optimism surrounding US debt limit extension, recent increase in Fed bets supporting June rate hike favor US Dollar.
• Risk catalysts, ECB President Lagarde’s speech will be the key to watch for clear directions.

EUR/USD fades late Wednesday’s rebound from the lowest levels in six weeks as market sentiment dwindles heading into Thursday’s European session. Also exerting downside pressure on the Euro pair, down 0.05% intraday near 1.0840 by the press time, are the doubts about the European Central Bank’s (ECB) hawkish bias versus the recent pick-up in the odds favoring the Federal Reserve’s (Fed) rate hike in June.

As per the interest rate futures, market players have recently supported an increase in the Fed rate by 0.25% in June, with the 20% probabilities versus expectations favoring no such actions in 2023. The hawkish might have taken clues from the latest US statistics and the hawkish Fed talks.

US Housing Starts came out as unimpressive with 1.401M figures for April versus 1.4M expected and 1.371M prior (revised). Alternatively, the Building Permits for the said month eased to 1.416M from 1.437M edited previous readings and market forecasts. Before that, upbeat US Retail Sales and Industrial Production details for April allowed the Federal Reserve (Fed) officials to remain hawkish and prod the risk-on mood. The latest among them were Federal Reserve Bank of Chicago President Austan Goolsbee and Atlanta Fed President Raphael Bostic who reiterate inflation fears and favored the EUR/USD bears.

On the other hand, the final readings of the Eurozone inflation for April, per Harmonized Index of Consumer Prices (HICP), eased to 0.6% MoM versus 0.7% previous estimations while confirming a 7.0% YoY initially forecasted increase. following the inflation data, the European Central Bank (ECB) policymaker and Bank of Spain's Governor Pablo Hernandez de Cos said in an MNI interview on Wednesday, “The persistence of higher inflation would slow the recovery and would very likely lead to further tightening in the euro area.”

Apart from the Fed versus ECB play, comments from US President Joe Biden and House Speaker Kevin McCarthy managed to convince the markets that they can unite to avoid the ‘catastrophic’ default, which in turn underpinned the market’s risk-on mood and propelled the US Dollar. It should be noted that the US Dollar Index (DXY) buyers keep the reins at the highest levels in seven weeks, mildly bid near 102.90 by the press time.

It’s worth noting that anxiety ahead of today’s ECB President Christine Lagarde’s speech and US President Biden’s assurance to have a budget solution by Sunday’s end seem to prod the EUR/USD bears. While portraying the mood, S&P500 Futures print mild losses despite the upbeat Wall Street close whereas the US Treasury bond yields remain sidelined at the multi-day top. That said, the US 10-year and two-year Treasury bond yields rose to the highest levels since May 01 and April 24 while portraying a four-day uptrend near 3.57% and 4.16% respectively, easing to 3.56% and 4.14% by the press time.

Apart from ECB President Lagarde’s speech, the second-tier US data and talks about the US debt limit may also entertain EUR/USD traders.

Technical analysis

The downbeat RSI (14) conditions and the 100-DMA support of near 1.0800 triggered the Euro pair’s rebound on Wednesday. However, bearish MACD signals and the EUR/USD pair’s sustained trading below the 1.0900 resistance confluence, comprising a convergence of the 50-DMA and the support-turned-resistance line stretched from September 2022, keep the bears hopeful.