Strong Yields Push Below 1.1350, Eying ECB Meeting

• The EUR/USD is fading intraday gains, holding the previous day’s retracement from weekly lows.
• Biden’s speech encourages yields, and US data is improving, but the spread between US and EU interest rates is favorable to buyers of the pair.
• In light of high inflation, the ECB will monitor session reports for signs of monetary consolidation.

The EUR/USD outlook is negative as the pair has fallen from its daily high to 1.1350 ahead of Thursday’s European session.

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On Wednesday, the major currencies rebounded from a weekly low after the US dollar weakened following Treasury yields. It seems, however, that the recent rebound in US bond coupons, helped by the Fed’s dovish hopes and upbeat US data, is exerting pressure on the listing. Furthermore, the quote weighting could be the latest disappointment for the US Senate in voting on the Build Back Better (BBB) plan.

Democrat senators Joe Manchin and Kirsten Sinema surprised colleges by voting against a proposal to repeal the filibuster rule and introduce a voting rights bill to save the BBB. As a result, the mood deteriorates in this market, attracting traders to the US dollar.

On Wednesday, US President Joe Biden highlighted the efforts of chief trade negotiator Catherine Tai Tai to resolve the Sino-US trade dispute. However, he also pointed out that the US is not ready to ease tariffs on Chinese goods. In addition, according to Biden, China is not honoring its procurement commitments, which led to a rise in US Treasury yields.

Additionally, US President Biden explicitly warned Russia not to invade Ukraine. It would lose access to the US dollar if it did, adding to risk appetite and benefiting the dollar.

However, the narrowing spread between US Treasury yields and German bond yields gives EUR/USD bulls hope. Following comments from European Central Bank (ECB) politician François Villeroy de Gallo, German 10-year bond yields topped 0.0% for the first time since May 2019.

An ECB’s executive board member recently said: “There is no longer any justification for debt support measures by any means.”

Contrary to the German inflation data, the stronger housing market data in the US was in line with the initial expectations for December.

These moves led to an increase of three basis points (bp) in 10-year US Treasury yields to 1.856%, as well as modest gains in S&P 500 futures.

The final reading of the Eurozone Consumer Price Index (CPI) for December, which is forecast at 5.0%, is due before the ECB’s report, determining the immediate path of the EUR/USD exchange rate. On the following day, the calendar will release data on jobless claims, the Philadelphia Fed’s manufacturing survey for January, and existing home sales for December.

As traders eagerly await the ECB’s meeting accounts for clues on how to limit stimulus and raise rates, traders may be entertained by US data ahead of next week’s Fed meeting. The key factors are the risk and return catalysts.

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EUR/USD price technical outlook: Bears eying breakout of 1.1300

The EUR/USD price failed to sustain above the 200-period SMA on the 4-hour chart. The 20 and 5 period SMAs are pointing south, keeping the pair under pressure. The average daily range is 37% so far, which indicates higher volatility. The bears may aim for 1.1330 ahead of 1.1300. However, if the 1.1300 mark breaks, we may see a test of 1.1260.

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