EUR/USD Forecast: Upcoming ECB Minutes to Augment Hawkish Bets?

EURO FUNDAMENTAL BACKDROP

The euro has been receiving fundamental boosts from the both the U.S. and eurozone . Beginning with the EZ region, stickier inflation readings, lower energy costs and a hawkish central bank have all provided sustenance for the EUR. The European Central Bank (ECB) although late to the party in terms if their interest rate hiking cycle (relative to other major central banks) has been extremely aggressive in their stance of recent. Yesterday, the ECB’s Villeroy strongly defended President Christine Lagarde’s forward guidance in favor of a 50bps rate hike in the next meeting while this morning began with another ECB official (Klaas Knot) upholding the aggressive rhetoric by stating that “the ECB are planning to hike by 50bps multiple times.”

Later today, the President Lagarde is scheduled to speak at Davos (0930GMT) after which the ECB’s minutes (see economic calendar below) will take center stage. Both are expected to deliver the same hawkish message which could see the euro bid against the dollar.

From a USD point of view, concerns over U.S. economic growth by way of the recent misses on U.S. PPI and retail sales has cast a shadow over the greenback and has almost locked in a 25bps increment for the Fed’s next meeting in February. Hawkish Fed speakers are being largely dismissed by markets at this point which should follow the same path today with the Fed’s Collins, Brainard and Williams on the docket. U.S. building permits data are expected to push higher in December coming off extreme lows in November which may dampen dollar upside should actual data fall in line with estimates.

EUR/USD ECONOMIC CALENDAR

EUR/USD DAILY CHART

Daily EUR/USD price action shows a recent sideways consolidation appearing; however, yesterdays long upper wick could lead to subsequent downside – fundamentals would have to permit such a move. The euro has made a swift comeback reaching levels last seen in April of 2022 in roughly 3.5 months which may be why bulls are so wary to drive the market higher. The Relative Strength Index (RSI) echoes this sentiment with upside momentum showing signs of slowing (bearish/negative divergence). A slight dovish take on either the ECB Presidents address or the ECB’s minutes could spark a move lower.

Resistance levels:

• 1.0900

Support levels:

• 1.0800
• 1.0774
• 1.0736

BEARISH IG CLIENT SENTIMENT

IGCS shows retail traders are currently SHORT on EUR/USD, with 58% of traders currently holding short positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment; however, due to recent changes in long and short positioning, we arrive at a short-term bullish bias.