EUR/USD skates on thin ice around 1.0550 amid hawkish ECB talks, higher Fed rate concerns

EUR/USD dribbles around mid-1.0500s as the European Central Bank (ECB) hawks jostle with the hopes of higher Federal Reserve (Fed) rates during early Monday. In doing so, the major currency pair seesaws around the lowest levels in seven weeks after posting the biggest weekly loss since September 2022.

During the weekend, ECB President Christine Lagarde said, “ECB must make sure inflation returns to 2%,” during an interview with Helsingin Sanomat. On the same line, ECB policymaker and Bundesbank Chief Joachim Nagel said on Friday he “can't rule significant further rate hikes after March.”

It should be noted that the previous weekly releases of the Eurozone inflation numbers have also tried to recall the EUR/USD buyers. However, the comparatively stronger US data and hawkish Fed comments seemed to have gained more attention and drowned the quote. Also adding strength to the downside bias were the geopolitical concerns surrounding Russia and China.

Friday’s US Personal Consumption Expenditures (PCE) gained major attention as the headline PCE Price Index rose to 5.4% YoY versus 5.3% prior and 4.9% market forecasts. Further, the more relevant Core PCE Price Index, known as Fed’s favorite inflation gauge, rose to 4.7% YoY, compared to 4.6% prior and analysts' forecast of 4.3%.

Talking about the Fed commentary, Cleveland Fed President Loretta Mester told CNBC on Friday that his funds' rate was above the median in December and still thinks they need to be somewhat above 5%. The policymaker also added that inflation risks still tilted to the upside. Following the suit was Federal Reserve Bank of Boston President Susan Collins, who said, “More rate hikes needed to deal with 'too high' inflation.”  Furthermore, Governor Philip Jefferson said, “Wage growth in the US is running too high to be consistent with a timely and sustainable return to the Federal Reserve's 2% inflation objective.”

With this, the latest read of the FEDWATCH tool, market players price a year-end effective fed funds rate at 5.3%, versus 5.1%, signaled by the US central bank in its December meeting.

Politico reports fresh sanctions on Russia from the US, the UK, and the European Union (EU states) after a clash between Poland and Italy held up the process for days.

On the other hand, Reuters came out with the news suggesting Russia’s halting of oil flow to Poland via the Druzhba pipeline.

Amid these plays, S&P 500 Futures remain indecisive even as Wall Street benchmarks posted the biggest weekly fall in 2023. That said, the US two-year Treasury bond yields rose to the highest since early November 2022, mainly staying unchanged at the latest.

To sum up, a battle between the hawks of the ECB and the Fed keeps the EUR/USD on the dicey floor. However, geopolitical concerns favor the bears.

Technical analysis

Given the nearly oversold RSI (14), the EUR/USD bears will likely rest near the 11-week-old ascending support line, close to 1.0545 by the press time. Also adding to the downside filters is the 200-bar Exponential Moving Average (EMA) level surrounding 1.0530. The recovery moves, however, remain elusive below the two-week-old descending resistance line, close to 1.0615 at the latest.