EUR/USD Gains Momentum on Hawkish ECB Talks

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The EUR/USD is currently trading near its nine-month high, buoyed by hawkish remarks from European Central Bank officials and a more dovish stance adopted by the Federal Reserve. Furthermore, upbeat Eurozone consumer confidence has added even more strength to this bullish bias. In order to sustain this positive momentum throughout the day, investors must keep close watch on preliminary readings of German, Eurozone and US PMIs for January as well as any speeches delivered by ECB President Lagarde.

As investors become more confident with the possibility of a Fed policy easing, EUR/USD could be headed for a re-test of 1.0900. The ECB is also likely to raise interest rates by another 50 bps to 3.25%, further increasing risk appetite in the market and strengthening the Euro against other currencies.

On Monday, ECB President Christine Lagarde and Governing Council member Ignazio Visco both affirmed their support for higher rates. Yet it was Peter Kazimir’s remarks that captured the spotlight – he asserted that two additional 50 basis point rate hikes were necessary.

According to a recent Reuters survey, economists are speculating that the European Central Bank (ECB) will raise rates by 50 basis points at their upcoming February monetary policy meeting. Consequently, they anticipate that this increase would bring the ECB’s policy rate up to 3.25% in mid-year 2021.

The European Central Bank’s hawkish stance versus the Federal Reserve’s easing bias, combined with a positive Eurozone Consumer Confidence report for January in comparison to downbeat US data, pushed EUR/USD higher. The United States Conference Board Leading Index dropped more than anticipated in December which weighed heavily on the value of USD.

On Tuesday, the US dollar index was hovering near a nine-month low versus the euro, and had rescinded its prior gains against the yen as investors evaluated both potential risks of U.S. recession and future Federal Reserve policy moves.

What to Watch for EUR/USD

EUR/USD is up by 0.26% at 1.0896 and with the following resistance located at 1.0926 (highest on Jan 23rd), followed by 1.0936 and possibly reaching the 1.1000 mark. On the downside, a breakdown below the weekly low of 1.0766 could take it towards the 55 day SMA near 1.0560 before eventually revisiting its monthly low of 1.0481 reached earlier on January 6th.

As the US dollar remains an influential factor on European currency performance, we must also consider how energy crisis developments and central bank discrepancies will affect it. In addition to this, current speculation of a potential downturn in the euro area may create some difficult short-term headwinds for the euro.

The European Central Bank’s ongoing hiking cycle, combined with decreasing chances of a recession in the area and still high levels of inflation, could have major consequences on economic growth and inflation outlooks. The conflict in Ukraine and continuing energy crisis will pose further risks that prices may become set for an extended period.

PMIs and ECB President Christine Lagarde will be the top focus for EUR/USD pair traders in upcoming days. A close watch should be kept on S&P Global surveys’ preliminary prints of monthly activity data from Germany, Eurozone and US to assess near-term directions. Expectations are high that ECB may show some hawkish bias which could support buying interest in the currency pair. Moreover, forecasts predicting upbeat figures from Germany and Eurozone compared to softer than expected US numbers suggest that buyers may keep a firm grip over EUR/USD prices going forward. Check the Weekly Market Outlook for more insights.

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