EUR/USD Falls to 1.0850 as German/US Data Deepens the Conflict Between the ECB and Fed

EUR/USD reestablishes intraday support at the mid-1.0800s on Wednesday morning, reversing Tuesday's rebound advances. In doing so, the main currency pair reflects the market's apprehension ahead of the Federal Open Market Committee (FOMC) meeting. German economic threats to the EU, as well as mixed data from the United States and suspicions that Fed Chairman Jerome Powell will protect hawks nevertheless, may also weigh on the currency.

Tuesday's preliminary readings of the Eurozone's Gross Domestic Product (GDP) for the fourth quarter (Q4) grew 0.1% QoQ, compared to 0.0% predicted and 0.3% previously. The YoY figures also offered a positive image of the bloc, surpassing the 1.8% market consensus to reach 1.9%, compared to 2.3% previously. However, German Retail Sales fell 5.3% month-over-month in December, which was significantly worse than anticipated. German GDP also disappointed EUR/USD pair speculators earlier in the week.

In contrast, the US Q4 Employment Cost Index (ECI) decreased to 1.0% compared to 1.1% market expectations and 1.2% previous readings. In addition, the Conference Board (CB) Consumer Confidence index declined to 107.10 in January from 108.3 in December. It should be noted that the US Chicago Purchasing Managers' Index (PMI) for January, which rose to 44.3 versus 41 anticipated and 44.9 previous readings, does not warrant significant attention.

Elsewhere, stronger profit reporting from industry leaders such as General Motors, Exxon, and McDonald's mitigated the US recession and boosted Wall Street benchmarks. Nevertheless, the Dow Jones Industrial Average (DJIA), the S&P 500, and the Nasdaq all posted daily gains of greater than 1.0% the day before. In contrast, US 10-year Treasury note yields reversed a three-day upswing and returned to 3.51 percent, while their two-year counterparts fell to 4.20 percent.

It should be mentioned that JP Morgan's annual poll revealed a decline in inflation concerns and an increase in recession worries, which in turn test the risk profile in the midst of pre-Fed angst. In spite of this, global rating giant Fitch anticipates that the US Consumer Price Index (CPI) would moderate to the mid-3.0% area in 2023 and the high-2.0% range in 2024, which in turn pressures EUR/USD bears.

In response to these factors, the S&P 500 Futures post moderate losses, while US Treasury bond yields stay sluggish and halt the previous day's decline. This permits the EUR/USD pair to prepare for the Fed's dovish 0.25 percentage point rate hike.

While the 0.25 basis point Fed rate hike is practically certain and has been priced in, EUR/USD traders will also focus on January activity data and Jerome Powell's ability to defend aggressive rate hikes.