EUR/USD Retreats Below 1.08600 Mark Amid Increased Risk Appetite, US Fed Interest Rate Decision Eyed
- Rebounding treasury bond yields offers some support to the greenback to
- A combination of downbeat Euro macroeconomic data undermines the Euro
- Markets await the release of the US Fed Interest Rate Decision later today
EUR/USD cross extended the overnight rebound from the vicinity of the 1.08755 level, attracted fresh selling on Wednesday during the early Asian session, and dragged spot prices back below the 1.08600 mark amid renewed USD Buying.
A fresh leg up in US treasury bond yields as investors dialled down their risk appetite ahead of some big central bank meetings over the next couple of days turned out to be a key factor that weighed on the EUR/USD pair and offered some support to the safe-haven greenback. Apart from this, negative sentiment surrounding the US Equity markets was also seen as another factor that helped to cap the upside for the pair.
The US Dollar index (DXY), which measures the value of the United States dollar relative to a basket of foreign currencies, was up 0.07% on Wednesday to trade at the $102.160 level after weakening in the previous sessions after softer US employment cost index prints showed Labor Costs in the US Rose at Slower Pace in Q4.
Compensation costs for civilian workers in the US increased 1% on quarter in the last three months of 2022, a third straight slowdown, compared to a 1.2% rise in the previous quarter and slightly lower than market forecasts of 1.1%. Year-on-year, compensation costs rose 5.1%, slightly above 5% in Q3, but adjusted for inflation, they fell 1.3%.
Furthermore, a US CB Consumer Confidence report released on Tuesday by the US Conference Board Consumer Confidence Index® decreased in January following an upwardly revised increase in December 2022. The Index now stands at 107.1 (1985=100), down from 109.0 in December (an upward revision).
Shifting to the European docket, German retail sales data for December, released on Tuesday, were considerably weaker than expected, falling -5.3% on the month in real terms, and went some way to explaining why GDP in Europe's largest economy fell 0.2% in the final quarter of the year. Additionally, Germany's seasonally adjusted number of unemployed people fell by 15 thousand from the previous month to 2.51 million in January 2023, missing market expectations of a 5 thousand gain. It was the second straight month of decline in unemployed people. French consumer spending also fell 1.3% on the month, illustrating the pressures on Europe's consumers, although the French economy achieved a gain of 0.1% in December last year.
The Eurozone publishes CPI data for December on Wednesday. Still, Pantheon Macroeconomics' Claus Vistesen warned that the numbers would "have to be taken with a pinch of salt" given that Germany has delayed publishing its figures due to technical problems. French consumer prices rose slightly less than expected, providing some relief after Spanish and Belgian inflation data on Monday sparked fears of a round of upside surprises across the Eurozone.
The Eurozone CPI data comes a day before the European Central Bank(ECB) announces its interest rate decision, the first for this year, in which it is widely expected the central bank will hike its interest rates by 50bps lifting its official cash rate to 3.00%. Suppose the ECB rides along with the market expectations that inflation is still not weakening enough and more needs to be done. In that case, we could see EUR/USD rising to match January highs of 1.09278, but that will all depend on today's US FED interest rate decision announcement.
The Federal Reserve is expected to raise the fed funds rate by 25bps to 4.5% - 4.75% in its February meeting later today, dialling back the size of the increase for a second straight meeting but still pushing borrowing costs to the highest since 2007. Investors will pay close attention to any clues about the central bank's next steps, especially if it states that ongoing increases in the target range will be appropriate. In December, Fed officials predicted interest rates to reach 5.1% this year, then to fall to 4.1% in 2024 and 3.1% in 2025. Economic data released since then has painted a mixed scenario. Inflation fell more than expected, manufacturing and housing have already taken a hit, and consumer spending is showing clear signs of slowing. On the other hand, the labour market remains robust; wage growth is still strong and economic growth in the last quarter of 2022 topped forecasts.
That said, the report would influence the near-term USD price dynamics. This should assist traders in determining the next leg of a directional move for the EUR/USD pair.
Technical Outlook: Four-Hour EUR/USD Price Chart
From a technical standstill using a four-hour price chart, the price has extended the modest rebound from the vicinity of the 1.08755 level, which sits above the key 50% fib level at 1.08646. Some follow-through selling would drag spot prices towards the next relevant hurdle (demand zone ranging from 1.08297 - 1.08410 levels). If sellers manage to breach this barricade, downside momentum could pick up the pace, paving the way for a drop toward retesting the key support level plotted by an ascending trendline extending from mid-January 2023 swing higher-low. Sustained weakness below this floor would pave the way for additional losses around the EUR/USD pair.
All the technical oscillators are in negative territory, with the RSI (14) at 46.67 below the signal line, portraying a bearish filter. On the other hand, the Moving Average Convergence Divergence (MACD) Crossover is below the signal line, pointing to a bearish sign for price action this week.
On the flip side, if dip-buyers and tactical traders jump back in and trigger a bullish turnaround, the initial resistance appears at the 50% and 61.8% Fibonacci Retracement levels at 1.08646 and 1.08810 levels, respectively. If the price pierces this barrier, buying interest could gain momentum, creating the right conditions for an advance toward January 2023 ceiling at the 1.09278 level.
