EUR/USD steadies above parity as traders await ECB’s Lagarde, Fed

• EUR/USD remains sidelined after witnessing a sluggish start to the key week.
• Economic fears surrounding Eurozone join hawkish Fed bets and Sino-American tension to keep bears hopeful.
• Pre-Fed consolidation of stocks join downbeat US housing data to weigh on DXY, despite firmer yields.
• Second-tier US data, risk catalysts will be in focus ahead of the FOMC.

EUR/USD dribbles around 1.0030 during Tuesday’s Asian session, after witnessing a four-day uptrend, as markets brace for the key central bank events. In doing so, the major currency pair fails to justify the economic fears at home, as well as geopolitical tensions emanating from China and Russia.

Downbeat US housing market numbers and a mostly priced-in 75 basis points (bps) rate hike from the Fed appear to help the EUR/USD pair amid a light calendar and an absence of the UK and Japan. Also keeping the pair buyers hopeful were firmer equities and inflation concerns.

Elsewhere, Reuters mentioned the correlation between the US 5-year/5-year inflation-linked swaps and the March 2023 Eurodollar prices, a key gauge of terminal Fed rate expectations until early Q2, to suggest the fear of a short squeeze. “If Fed rhetoric after Wednesday's meeting were to reinforce signals from swaps and consumers, U.S. rates and the dollar should weaken, which would likely drive a big EUR/USD short squeeze,” said Reuters.

Also positive could be the EU policymakers’ readiness to use emergency powers to avoid a supply crisis. Reuters reports after obtaining the European Union (EU) draft rules. “Under draft rules, the EU is to ask companies to accept priority rated orders for critical products.”

On the same line, European Central Bank (ECB) Vice President Luis de Guindos said on Monday that “growth slowdown is not enough to ease inflation.”

Furthermore, US Dollar Index (DXY) started Monday on a positive footing before downbeat US housing data and hawkish Fed bets raised doubts on the upside gap available for the greenback to react to the Fed’s 0.75% rate hike, which is mostly priced in. That said, the NAHB Housing Market Index fell for a ninth consecutive month to 46 versus 48 expected and 49 prior.

Alternatively, the Bundesbank said on Monday that it expects the German economy to shrink markedly in the autumn and winter months amid reduced or rationed energy consumption, as reported by Reuters.

Further, US President Biden said, “I'm more optimistic than I have been in a long time.” The national leader also stated that they are going to get control of inflation. However, US President Biden’s readiness to back Taiwan in case China attacks Taipei and the hawkish hopes for the Fed seemed to weigh on the EUR/USD price ahead of the key monetary policy announcements. In a response to US President Biden’s comments, China’s Foreign Ministry said on Monday that Beijing “deplores and firmly opposes this and has lodged stern representations.”

Against this backdrop, Wall Street closed positive and the US Treasury yields refreshed cycle tops but the DXY remains pressured.

Looking forward, a few more US housing data and comments from ECB President Christine will entertain the EUR/USD traders ahead of the key Wednesday. Should ECB’s Lagarde choose to remain hawkish, the pair may witness further upside while preparing the ground for bears.

Technical analysis

Gradually firmer RSI and MACD signals keep buyers hopeful to overcome the 50-SMA immediate hurdle surrounding 1.0035, after witnessing multiple defeats to cross the same in the last week. If not, then the 0.9945 support holds the key to the EUR/USD pair’s fresh downside.