EUR/USD sticks to modest gains just above 1.0700 mark, upside potential seems limited
- EUR/USD gains some positive traction on Thursday and is supported by a combination of factors.
- ECB’s Lagarde reiterates the intention to raise rates by 50 bps in March, which benefits the Euro.
- A positive risk tone undermines the safe-haven USD and remains supportive of the positive move.
- Hawkish Fed expectations, recession fears should limit the USD losses and cap any further gains.
The EUR/USD pair attracts some buying during the Asian session on Thursday and recovers a part of the previous day’s losses. The pair is currently placed just above the 1.0700 round figure, up around 0.20% for the day, and for now, seems to have stalled this week’s rejection slide from the 1.0800 mark.
The shared currency draws support from hawkish remarks by the European Central Bank (ECB) President Christine Lagarde, which, along with a modest US Dollar downtick, act as a tailwind for the EUR/USD pair. In a speech to the European Parliament, Lagarde reiterated that the ECB intends to raise interest rates by another 50 bps at the next policy meeting in March. She further added that future policy decisions will continue to be data-dependent and follow a meeting-by-meeting approach.
The USD, on the other hand, extends the overnight pullback from a six-week high and is weighed down by retreating US Treasury bond yields. Apart from this, a generally positive tone around the equity markets further seems to undermine the safe-haven buck, which, in turn, is seen as another factor lending support to the EUR/USD pair. That said, the prospects for further policy tightening by the Federal Reserve should help limit the downside for the US bond yields and the Greenback. Investors now seem convinced that the Fed will stick to its hawkish stance amid stubbornly high inflation.
The bets were lifted by the US CPI report and hawkish commentary by several FOMC members on Tuesday. Adding to this, the upbeat US Retail Sales data released on Wednesday indicated that the economy remains resilient despite rising borrowing costs, which should allow the US central bank to keep interest rates higher for longer. This, along with looming recession risks, might hold back the USD bears from placing aggressive bets and contribute to capping gains for the EUR/USD pair. Even from a technical perspective, the pair already seems to have confirmed a breakdown below the 50-day SMA.
The aforementioned fundamental backdrop and the technical setup suggest that the path of least resistance for the EUR/USD pair is to the downside. Hence, any subsequent move up might still be seen as a selling opportunity and runs the risk of fizzling out rather quickly. In the absence of any relevant market-moving economic data from the Eurozone, the USD price dynamics will continue to play a key role in influencing the major. Later during the early North American session, trades will take cues from the release of the US Producer Price Index (PPI) for some meaningful impetus.