EUR/USD stays defensive above 1.0500 with eyes on US Federal Reserve, European Central Bank

EUR/USD treads water around 1.0530 as the bumper week begins, having witnessed the first weekly loss in three.

In doing so, the major currency pair portrays the typical cautious mood ahead of the key monetary policy meetings of the Federal Reserve (Fed) and the European Central Bank (ECB). Also important to watch are the preliminary readings of the November month’s activity data from Europe and the United States, not to forget the US inflation numbers. It’s worth noting that the recently firmer US economics and doubts over the Eurozone economic recovery seem to challenge the EUR/USD bulls after two consecutive weeks of the uptrend.

Data from United States, Europe challenge EUR/USD bulls

Not only Friday’s US Producer Price Index (PPI) and Consumer Sentiment Index from the University of Michigan (UoM) but the US ISM Services PMI and inflation expectations also flashed upbeat outcomes in the latest announcements. However, European economics aren’t that good and hence keep the Euro bears hopeful.

That said, US Producer Price Index (PPI) matched the market forecasts of 7.4% YoY for November versus 8.1% prior. Further, the Core PPI rose to 6.2% YoY versus 6.0% expected and 6.7% previous readings. Additionally, preliminary readings of the University of Michigan’s (UoM) Consumer Sentiment Index rose to 59.1 for December versus 53.3 market forecasts and 56.8 final readings for November. Moreover, the 1-year inflation expectations dropped to 4.6%, the lowest since September 2021 while compared to 4.9% expected whereas 5-10 year expectations were stable at 3.0%. It should be noted that the US ISM Services PMI improved to 56.5 versus 54.4 expected. As a result, the US Dollar Index (DXY) printed the first weekly close on the positive side in the last three.

On the other hand, the final readings of the S&P Global Eurozone PMIs for November witnessed a downward revision while Retail Sales for the bloc also dropped by 1.8% MoM and 2.7% YoY. It should be observed that the Eurozone GDP for the third quarter (Q3) improved to 0.3% versus the initial estimations of 0.2%. Amid these plays, the Euro struggles for major directions and lost the upside momentum.

Federal Reserve appears more hawkish than European Central Bank

Although the US Federal Reserve (Fed) and the European Central Bank (ECB) are both likely to announce a 0.50% rate increase, the recently firmer US data and the latest comments from the policymakers suggest that the Fed will be more hawkish than the ECB.

That said, the discussions surrounding the Quantitative Tightening (QT) might be of interest for the US Dollar traders when it comes to the Fed, as they’ve already teased the ‘pivot’. Should the policymakers suggest such moves, the EUR/USD pair may witness a reversal of the latest gains.

ECB, on the other hand, will have to defend the growth expectations and balance the announcements surrounding the QT to keep the Euro bulls on board. That said, discussions surrounding the pandemic emergency purchase programme (PEPP) and asset purchase programme (APP) of the European Central Bank will be crucial for the EUR/USD pair buyers to watch.

Considering this, analysts at ANZ said, “Following the very rapid tightening in policy rates this year, we expect the FOMC, ECB and BoE will scale back the magnitude of rate hikes to 50bp but reaffirm that they remain determined to bring inflation back to target and will take the appropriate and necessary steps to achieve that.”

Too many things to watch for EUR/USD traders

Other than the monetary policy decisions from the ECB and the Fed, monthly inflation data from the United States and the December month’s preliminary activity numbers for Europe and the US will also be important for the Euro traders to watch. Forecasts suggest an overall firmer outcome of the US data than the ones from Europe, which in turn could help the EUR/USD pair bears to keep the reins. However, major attention will be given to the ECB versus Fed drama for clear directions.

US recession, EU-Russia tension are extra catalysts

Other than the aforementioned signals, the EUR/USD pair will also need to take care of the headlines surrounding the United States recession and the latest tension between Russia and Europe to aptly determine the short-term performance. That said, the growing fears of the US recession may allow the EUR/USD bulls to try one more time but the geopolitical fears may underpin the US Dollar’s safe-haven demand and can favor the EUR/USD pair buyers.

EUR/USD technical analysis

EUR/USD portrays a double top formation around 1.0585-95, which in turn joins the recent retreat of the Relative Strength Index (RSI) line, placed at 14, to challenge further upside bias for the pair.

However, a convergence of the 50-SMA and an upward-sloping support line from early November, close to 1.0500, holds the key for the EUR/USD seller’s entry.

Also acting as a short-term downside filter is the previous 1.0440, a break of which will confirm the “double top” bearish chart pattern and theoretically favors a downturn toward the 1.0280 support.

Meanwhile, the EUR/USD pair’s upside clearance of 1.0595 hurdle will need validation from the 1.0600 threshold and monthly ascending resistance line, close to 1.0635, to defend the dominance. Following that, May 2022 peak surrounding 1.0785-90 will be in focus.

Overall, EUR/USD bulls seem running out of steam but the downside needs a trigger, which in turn highlights 1.0500 support confluence.

EUR/USD: Four-hour chart

Trend: Pullback expected