EUR/USD stays defensive around 1.0700 ahead of Eurozone PMIs, Fed Minutes

• EUR/USD fades bounce off six-week low amid sluggish markets.
• US holiday, light calendar on Monday restrict immediate moves.
• ECB vs. Fed battle intensifies ahead of FOMC Minutes, preliminary PMIs for February.
• Geopolitical headlines, hawkish central banks weigh on sentiment and underpin US Dollar strength.

EUR/USD retreats from the intraday high surrounding the 1.0700 threshold as traders struggle for clear directions during Monday’s initial Asian session. The market’s inaction could be linked to the holidays in the US and Canada, as well as a light calendar elsewhere. Even so, geopolitical conditions surrounding China and Russia join the recently hawkish Federal Reserve (Fed) bias, versus the doubts about the European Central Bank’s (ECB) future moves, to probe the pair buyers.

On Friday, ECB policymaker Francois Villeroy de Galhau said, "We will keep rates high as long as necessary; we must be careful not to declare victory too quickly." On the same line were comments from ECB Governing Council member Isabel Schnabel who told Bloomberg that another 50 basis points (bps) rate hike in March will be needed under virtually all scenarios.

In addition to the hawkish ECB comments, the US Dollar’s corrective pullback also allowed the EUR/USD pair to portray a bounce off the six-week low the previous day.

However, the firmer prints of the US Consumer Price Index (CPI) and Retail Sales followed the previously flashed upbeat readings of employment and output data and propelled the odds of the US economy witnessing more inflation ahead. The same joins hawkish Federal Reserve comments to underpin the firmer US Treasury bond yields and the US Dollar to exert downside pressure on the EUR/USD price.

As per the latest Federal Reserve (Fed) talks, Fed Governor Michelle Bowman said, “We are seeing a lot of inconsistent data in economic conditions,” as reported by Reuters. On the contrary, Richmond Fed President Thomas Barkin said that they are seeing some progress on inflation with demand normalizing, as reported by Reuters.

Elsewhere, the US-China tensions are back on the table as the latest meeting between US Secretary of State Antony Blinken and China's top diplomat Wang Yi seemed to have failed in restoring the US-China ties. The reason could be linked to a Chinese diplomat’s comments saying that the US must change course and repair the damage done to Sino-US ties by indiscriminate use of force. On the same line, US ambassador to the United Nations, Ambassador Linda Thomas-Greenfield, said Sunday that China would cross a “red line” if the country decided to provide lethal military aid to Russia for its invasion of Ukraine.

Amid these plays, the US 10-year Treasury bond yields rose to the highest levels since early November while the equity benchmarks were mostly in the red, which in turn weighed on the S&P 500 Future by the press time. That said, the US Dollar Index (DXY) marked the third consecutive weekly gain.

Looking ahead, the risk-off mood may exert downside pressure on the EUR/USD pair amid a likely sluggish day. That said, major attention will be given to the first readings of the UK’s February month PMIs and join the monetary policy meeting minutes by the Federal Reserve (Fed), up for publishing on Wednesday. Also important will be Thursday’s second reading of the US fourth quarter (Q4) Gross Domestic Product, to direct immediate EUR/USD moves.

Technical analysis

A clear downside break of a three-month-old ascending trend line, now immediate resistance around 1.0730, keeps EUR/USD bears hopeful.