The EUR/USD pair continues to trade below the key psychological level of 1.1000, as the US dollar gains strength amid rising inflation expectations and hawkish Fed signals. The pair is currently trading at 1.0966, down 0.11% on the day.
The EUR/USD pair has been unable to sustain a recovery above the 1.1000 mark, as the US dollar remains supported by the upbeat economic outlook and the prospects of monetary policy tightening. The US dollar index (DXY), which measures the greenback against a basket of six major currencies, rose to a fresh three-month high of 96.85 on Wednesday, before easing slightly to 96.76 at the time of writing.
The US dollar has been boosted by the strong consumer confidence data, which showed that the index rose to 115.8 in December from 109.5 in November, beating the market expectations of 111.0. The data indicated that the US consumers are optimistic about the current and future economic conditions, despite the challenges posed by the Omicron variant and the supply chain disruptions.
The US dollar also found support from the hawkish signals from the Federal Reserve, which announced last week that it would accelerate the tapering of its asset purchases and signaled three interest rate hikes in 2022. The Fed also revised up its inflation and growth forecasts for the next year, reflecting the resilience of the US economy amid the pandemic.
The EUR/USD pair, on the other hand, has been weighed down by the diverging monetary policy stance between the Fed and the European Central Bank (ECB), which has maintained a cautious and accommodative approach. The ECB President Christine Lagarde said last week that the bank would keep its interest rates at record lows until it sees a sustained increase in inflation, which is expected to remain below its 2% target in the medium term. The ECB also extended its pandemic emergency purchase program (PEPP) until March 2022, and said it would reinvest the maturing bonds until at least the end of 2024.
EUR/USD technical analysis: The pair faces a strong resistance at 1.1000 amid bearish outlook
From the technical perspective, the EUR/USD pair maintains a bearish outlook on the four-hour chart, as it trades below the 200-hour Exponential Moving Average (EMA) and the upper boundary of the Bollinger Band. The Relative Strength Index (RSI) stands in the bearish territory below the 50 midline, indicating the downward pressure on the pair.
The immediate resistance level for the pair is seen at 1.1000, which coincides with the psychological round figure, the 200-hour EMA, and the upper limit of the Bollinger Band. A break above this level would open the door for a rally towards the next resistance at 1.1042, which marks the high of August 4. The subsequent barrier is located at 1.1149, which corresponds to the high of July 27.
On the downside, the key support level for the pair is seen at 1.0930, which represents the lower boundary of the Bollinger Band and the 50-hour EMA. A breach below this level would expose the next support at 1.0895, which is the low of November 24. The final cushion is seen at 1.0825, which is the low of November 17.
EUR/USD four-hour chart
![EUR/USD four-hour chart]
EUR/USD fundamental analysis: The pair awaits the Eurozone inflation data for fresh impetus
The EUR/USD pair awaits the release of the Eurozone inflation data for November, which is due later on Wednesday. The market expects the Harmonized Index of Consumer Prices (HICP) to drop to 3.9% year-on-year from 4.2% in October, while the core HICP, which excludes volatile items such as food and energy, is forecast to remain unchanged at 2.1% year-on-year.
The inflation data will provide more clues about the inflationary pressures in the Eurozone, and the possible policy response from the ECB. A higher-than-expected inflation reading could boost the EUR/USD pair, as it would increase the chances of the ECB adopting a more hawkish stance in the future. Conversely, a lower-than-expected inflation reading could weigh on the EUR/USD pair, as it would reinforce the ECB’s dovish stance and widen the policy divergence with the Fed.
The EUR/USD pair will also keep an eye on the US economic data, such as the durable goods orders, the personal income and spending, and the personal consumption expenditures (PCE) price index, which is the Fed’s preferred inflation gauge. The market anticipates the PCE price index to rise to 5.1% year-on-year in November from 5.0% in October, while the core PCE price index, which excludes food and energy, is expected to increase to 4.2% year-on-year from 4.1%.
The US economic data will provide more insights into the strength of the US economy and the inflationary pressures, and the implications for the Fed’s monetary policy. A stronger-than-expected economic and inflation data could lift the US dollar and pressure the EUR/USD pair, as it would reinforce the expectations of a faster and more aggressive policy tightening from the Fed. On the other hand, a weaker-than-expected economic and inflation data could dent the US dollar and support the EUR/USD pair, as it would temper the expectations of a hawkish Fed.