EUR/USD: Mildly offered above 1.1300 as pre-Fed fears propel yields, Eurozone/US PMIs eyed

• EUR/USD reverses Friday’s corrective pullback from two-week low.
• Yields consolidate the first negative weekly loss in five with eyes on Fed’s verdict, stock futures print mild gains.
• Russia-Ukraine fears, Omicron updates add to the watcher’s list, weigh on prices.
• Preliminary readings of January PMI, inflation data can act as buffers ahead of Wednesday’s FOMC.

EUR/USD extends the previous week’s downbeat performance towards a two-month-old support line, down 0.10% around 1.1330 ahead of Monday’s European session.

The major currency pair’s latest losses could be linked to the market’s risk-off mood ahead of the key weekly event, namely Wednesday’s Federal Open Market Committee (FOMC) meeting. Also weighing on the quote are the geopolitical concerns surrounding Russia and Ukraine, as well as fears of the South African covid variant namely Omicron.

It’s worth noting that the expectations of the Fed’s March rate hike signals recently took clues from the latest comments from US President Joe Biden and International Monetary Fund Managing Director Kristalina Georgieva. Both these key authorities highlighted inflation fears and praised Fed’s push for tighter monetary policies.

On the contrary, ECB Meeting Accounts failed to impress Euro bulls while ECB President Christine Lagarde said on Friday that geopolitics and weather factors are driving energy prices higher, but that the ECB is not seeing wages being bid up. Lagarde added that demand in Europe is not excessive and, as a result, we are unlikely to face the same inflation as the US. 

Elsewhere, the US State Department and UK Deputy Prime Minister Dominic Raab both flashed warnings over Russia’s preparations for invading Ukraine, which in turn magnified geopolitical fears and drowned EUR/USD prices.

Amid these plays, the US 10-year Treasury yields rose 3.6 basis points (bps) to 1.783%, snapping a three-day decline, as traders anticipate hawkish Fed verdict, amid firmer inflation, during this week’s key meeting. It should be observed that hopes of the US stimulus and receding virus numbers join the People’s Bank of China’s (PBOC) another rate to underpin mild optimism during the Asian session.

Looking forward, January’s initial activity data will be closely watched for intraday direction. Given the already watered-down hopes from German and Eurozone PMIs, the EUR/USD prices are likely to remain pressured ahead of the US activity numbers. Should Markit figures for the US PMIs match upbeat expectations, inflation fears will have an additional role to weigh on the EUR/USD prices before the Fed’s verdict.

Read: Fed Preview: Three ways Powell could out-dove markets, dealing a blow to the dollar

Technical analysis

In addition to the EUR/USD pair’s failures to cross the 20-DMA level of 1.1350, bearish MACD signals also suggest the bear’s firm determination to break an upward sloping trend line from late November, which has been defending buyers of late around 1.1300.