Improved risk appetite extends EUR/USD winning streak despite hawkish FOMC minutes and mixed Eurozone data

The EUR/USD extended its 7-day winning streak today, 22^nd February 2024, despite the hawkish tone of the minutes from the FOMC’s January meeting. Published yesterday, the FOMC minutes highlighted the cautious tone policymakers have been taking in recent weeks.

Earlier in the winter, markets were reluctant to take the Fed’s hawkish outlook too seriously. This has all changed since the start of this month. Since the beginning of February, traders have lowered their expectations on the number of times the Fed will cut rates in 2024, from six in January to a current level of four. They have also extended their timeline of when those cuts will begin, from March to June.

While markets remain unhappy with the idea of higher-for-longer interest rates, it’s heartening to finally see harmony between the Fed’s outlook and market expectations. “After the December FOMC meeting, the market and the Fed’s expectations for interest rate cuts were historically out of whack,” said Meghan Swiber, a US interest rate strategist at Bank of America. “A big driver of that gap between the market and the Fed was the market’s expectation for a very quick pace of disinflation. The recent data flow has pushed back on that.”

In recent weeks we have seen clear signs that the US economy is still powering on, despite the pressure of record-high borrowing costs. This gives the Federal Reserve twin headaches. The first is that systemic inflation is proving very hard to root out. The second is that any loosening of interest rates will only encourage participants in the booming economy to borrow and spend at a higher rate, potentially supercharging inflation.

With this broad fundamental backdrop, traders may be asking why the EUR/USD has been on a bull run over the past week. The answer lies in an improving risk mood. Traders have been buoyed by gains in the stock market, topped off by Nvidia’s remarkable earnings figures which pushed Japan’s Nikkei 225 to close at its highest-ever level on Thursday.

In addition, while PMI figures coming out of Germany and the Eurozone showed a surprise decrease in manufacturing output, services data beat expectations and the Deutsche Bundesbank anticipates a general decline in the inflation rate in the upcoming months.

Will the EUR/USD continue its bull run? In the short run, this is more likely than not. But all eyes will be firmly fixed on the Core PCE (the Fed’s preferred inflation measure) data to be released a week from now. An improved risk appetite or not, if inflation comes in above expectations the EUR/USD will face serious pressure.

On the Technical Front

As mentioned, the EUR/USD has been on a bull run for more than a week, which looks set to continue. Having passed the moving averages (50-day EMA, 100-day EMA, and 200-day EMA) earlier on Thursday, the price is now facing resistance at the 1.08620 level, which correlates with the 50% Fibonacci Retracement level of the July 2023 – Sept 2023 downtrend.

The 14-day Relative Strength Index (RSI) sits at 54.77, having crossed the RSI-based MA (yellow) last Wednesday, suggesting further upside moves. The MACD (at the bottom) has also crossed above the signal line, confirming this bullish momentum.

Any moves above the 1.0860 level could see the 1.0900 psychological level come into focus, and beyond that, traders will be eyeing the 1.0950 level. A break below the 1.0800 level, which corresponds with the 200-day EMA (purple), could lead to a decline all the way to the 1.0760 level (38.2% Fibonacci Retracement level).