EUR/USD analysis: Hawkish Lagarde underpins euro ahead of key US data

• EUR/USD analysis: Lagarde emphasises increasing significance of wages in driving inflation
• US dollar weakens as risk appetite improves ahead of data dump
• EUR/USD technical levels and factors to watch

EUR/USD analysis: Euro’s recovery could fade against US dollar

The EUR/USD edged higher, up for the second day, after rising back above the 1.07 handle. The single currency was trading mixed against other majors, but the EUR/GBP was also higher following some weak GDP figures from the UK which confirmed the nation was in a technical recession in the second half of 2023. The rising EUR/GBP exchange rate also contributed to the EUR/USD’s slight recovery, for there wasn’t much in the way of data from the Eurozone to watch today. However, we did hear from Christine Lagarde, the ECB chief, who was once again cautious about lowering interest rates too soon. In the afternoon, we will have key data to look forward to from the US. Unless we see surprisingly weak numbers, the EUR/USD may well resume lower as the US dollar was testing support against a number of other major currencies.

Lagarde emphasises increasing significance of wages in driving inflation

Christine Lagarde highlighted that the rising wages are increasingly becoming a crucial consideration for policymakers as they assess the timing for initiating interest rate reductions.

“Wage growth continues to be strong and is expected to become an increasingly important driver of inflation dynamics in the coming quarters,” said Lagarde, adding that: “Wage pressures for 2024 hinge particularly on the outcome of ongoing or upcoming negotiation rounds that affect a large share of euro area employees” over the next few months.

Other ECB official have also sounded more hawkish than dovish in recent remarks. Isabel Schnabel, for example, has cautioned against premature reductions in borrowing costs, highlighting persistent services inflation, a resilient labour market, looser financial conditions, and tensions in the Red Sea as potential risk factors for prices.

In remarks made on Wednesday, Bundesbank President Joachim Nagel emphasised the historical precedent indicating that it is more detrimental to loosen monetary policy prematurely rather than too late. He warned of the potentially greater economic costs associated with acting too hastily, suggesting that moving prematurely could result in "a higher price in the end in economic terms."

EUR/USD analysis: US dollar weakens as risk appetite improves ahead of data dump

Aside from profit-taking, another factor that contributed to downward pressure on the dollar over the past day and a half has been the increase in risk appetite within the global equity market. This morning witnessed Germany’s DAX index reaching a new record high, despite cautious remarks from ECB President Christine Lagarde and mixed earnings reports. Sentiment improved as US tech giants rebounded on Wednesday, following the previous day's sell-off prompted by CPI-related concerns. The swift improvement in sentiment helped boost some of the commodity-linked currencies against the dollar.

After a hot CPI print on Tuesday and the lack of any major news on Wednesday, the focus is now turning to this week’s other data releases. Unless we see some disappointment in data, the dollar’s bullish momentum may well continue in short-term outlook. Incoming US data will have to weaken significantly to dent the dollar’s rally.

Up next, we have retail sales, industrial production, jobless claims, and Manufacturing indices from Philadelphia and New York, all scheduled for release later on Thursday. A day later, on Friday, we will have PPI, building permits, and UoM Consumer Sentiment.

If this week's upcoming data, especially retail sales, continue to showcase economic resilience in the US, it is likely to bolster the US dollar further, keeping the pressure on the EUR/USD.

EUR/USD analysis: technical levels and factors to watch

Source: TradingView.com

Following Tuesday’s sell-off, the EUR/USD breached yet another crucial support range spanning from 1.0720 to 1.0755, previously a robust support area in December and, to a lesser extent, on a few occasions earlier this month. The EUR/USD had risen to retest this area from underneath, at the time of writing. For price to maintain its bearish trend, the bears will need to step in and defend their ground here. If so, we could see a drop below this week’s earlier low at 1.0695 initially. And if the prevailing trend continues, we could see a move towards the next potential support levels including 1.0670, followed by 1.0580 and ultimately 1.0500. However, a bullish technical shift would only occur with a daily closure above the 1.08 handle, for that will create a higher high.

EUR/USD analysis video and insights on FX majors

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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