EUR/USD clings to mild gains near 1.0850 as ECB, Fed hawks jostle amid recession concerns

• EUR/USD grinds higher around intraday top as it braces for the second consecutive weekly gain.
• Although Fed officials also sync the tune with ECB hawks, hopes of shorter recession in Europe favor bulls.
• Downbeat US data renew economic fears surrounding the world’s largest economy and probe DXY bulls.
• ECB President Lagarde’s speech, Fed talks before the pre-FOMC blackout will be crucial for clear directions.

EUR/USD bulls do keep the reins around 1.0840 as they aim for the second weekly gain in a row during early Friday.

The major currency pair’s latest gains could be linked to the US Dollar’s broad weakness, as well as optimism surrounding the old continent, namely Eurozone. It’s worth noting, however, that the Federal Reserve (Fed) officials seem to challenge the upside momentum of late.

Although European Commissioner for Economy Paolo Gentiloni said on Thursday, “We're in a period of economic contraction,” European Central Bank (ECB) President Christine Lagarde stated that economic news has become much more positive. Adding strength to the cautious optimism were comments from ECB’s Lagarde as she said, “We may only see a small contraction in the Eurozone,” as well as, “Will stay the course with rate hikes”.

It should be noted that ECB policymaker Klaas Knot was too aggressive and stated that the ECB is planning to hike by 50 bps multiple times. On the same line was the latest statement of the ECB Monetary Policy Meeting Accounts. “A large number of members initially expressed a preference for increasing the key ECB interest rates by 75 basis points,” mentioned ECB Accounts the previous day.

On the other hand, Federal Reserve Bank of New York President John Williams said that the US central bank has more rate hikes ahead and sees signs inflationary pressures might be starting to cool off from torrid levels. Late Thursday, Fed Vice Chair Lael Brainard said that it will take time and resolve to get high inflation down to the fed's 2% target. The policymaker also added, “The policy will need to be sufficiently restrictive for some time.” Additionally, Boston Fed President Collins signaled that the baseline remains that the effective fed funds rate should settle slightly above 5.0%, implying three more 25bp rate rises.

It should, however, be noted that the Fed policymakers’ hawkish play fail to get many accolades amid mixed data. That said, the US Unemployment Claims dropped to the lowest levels since late April 2022, to 190K for the week ended on January 13 versus 214K expected and 205K prior. Further, the Philadelphia Fed Manufacturing Survey Index improved to -8.9 for January compared to -11.0 market forecasts and -13.7 previous readings. However, US Building Permits eased in December to 1.33M MoM versus 1.37M consensus and 1.351M prior while the Housing Starts also dropped to 1.382M during the stated month from 1.401M in November, versus 1.359M expected. Previously, the downbeat US Retail Sales and Producer Price Index (PPI) raised fears of a recession in the world’s largest economy after the softer wage growth and activity data flashed earlier.

Elsewhere, sluggish moves of the key US Treasury bond yields and mild gains of the S&P 500 Futures also exert downside pressure on the US Dollar’s haven demand and propel the EUR/USD prices.

Looking forward, EUR/USD traders should pay attention to ECB President Lagarde’s speech and the Fed policymakers’ last appearances before the pre-Fed blackout period, starting from Saturday. Should the ECB hawks weigh more than their Fed counterparts, the major currency pair could end up refreshing the monthly high.

Technical analysis

Wednesday’s Doji candlestick on the Daily chart joins the following run-up by the EUR/USD pair to keep buyers hopeful of crossing the latest peak surrounding 1.0890.