EUR/USD trims gains near 1.0650 ahead of FOMC Minutes, Fed vs. ECB divergence is in focus

• EUR/USD consolidates the first daily gains in three, retreats from intraday high of late.
• Strong EU data, hawkish ECB bets favor Euro buyers amid mixed sentiment.
• Geopolitical fears join upbeat US PMIs, yields to weigh on EUR/USD ahead of the key Fed Minutes.
• FOMC Minutes should stay away from chatters surrounding Fed’s policy pivot to keep bears hopeful.

EUR/USD extends pullback from intraday high to 1.0650 during the first positive day in three amid the early Wednesday.

That said, The Euro pair’s initial gains could be linked to the US Dollar’s retreat amid a cautious mood ahead of the Federal Open Market Committee’s (FOMC) Monetary Policy Meeting Minutes. Also adding strength to the EUR/USD run-up were the sluggish US Treasury bond yields after they refreshed a three-month high. Furthermore, concerns that the European Central Bank (ECB) will increase the benchmark rates to an all-time high also strengthened the pair’s rebound. However, the latest recovery in the bond coupons and receding optimism in the markets seem to weigh on the pair of late.

On Tuesday, Germany’s preliminary S&P Global/BME Manufacturing PMI for February unexpectedly dropped to 46.5 versus 47.8 expected and 47.3 previous readings. The Services counterpart, on the other hand, rose more than 51.0 expected to 51.3, compared to 50.7 prior. On the same line, Eurozone S&P Global Manufacturing PMI dropped to 48.5 for the said month, from 48.8 prior and versus 49.3 market forecasts. Further, the Services PMI rose to 53.0 from 51.0 expected and 50.8 previous readouts.

Overall, Germany’s Composite PMI improved to 51.1 from 49.9, compared 50.4 market forecast, whereas its Eurozone counterpart jumped to 52.3 versus 50.6 market forecasts and 50.3 prior. It should be noted that ZEW Survey for Germany and Eurozone were for upbeat for February. That said, ZEW Survey, Economic Sentiment rose to 28.1 and 29.7 for Germany and the bloc in that order, from 16.9 and 16.7 respectively.

It’s worth mentioning that the latest piece from the Financial Times (FT) highlights increasingly hawkish ECB bets to put a floor under the EUR/USD price. “Swap markets are pricing in a jump in the ECB’s deposit rate to 3.75 percent by September, up from the current 2.5 percent. That would match the benchmark’s 2001 peak, when the ECB was still trying to shore up the value of the newly launched Euro,” said FT.

On the other hand, US S&P Global Manufacturing PMI rose to 47.8 in February from 46.9 prior and versus 47.3 market forecasts while the Services PMI jumped to the eight-month high to 50.5 compared to 47.2 expected and 46.8 previous readings. As a result, the S&P Global Composite PMI surpassed 47.5 analysts’ consensus and 46.8 previous reading to mark 50.2 figure.

The strong data helped the FEDWATCH tool to suggest that the money market participants see the benchmark level peaking at 5.3% in July, and staying near those levels throughout the year, versus 5.10% expected by the US Federal Reserve (Fed).

Elsewhere, comments from US Secretary of State Antony Blinken and Russian President Vladimir Putin weigh on the market sentiment and the Gold price as both suggest further tension between Moscow and Kyiv, which also includes indirect participation of the West and China of late. Though, an absence of major updates in Asia seemed to have paused the risk-off mood and allowed the US Dollar bulls to take a breather earlier on Wednesday.

While portraying the mood, the US 10-year and two-year treasury bond yields seesaw around the three-month highs marked the previous day while S&P 500 Futures print mild gains despite Wall Street’s negative closing.

Looking ahead, the second version of Germany’s Harmonized Index of Consumer Prices (HICP) inflation gauge and IFO sentiment numbers could entertain EUR/USD traders ahead of the key Fed Minutes. That said, the signals for the Fed policy pivot will be enough to please the EUR/USD buyers.

Technical analysis

A daily closing below the 50-day Exponential Moving Average (EMA), around 1.0680 by the press time, keeps EUR/USD bears hopeful of refreshing monthly low, currently around 1.0610.