EUR/USD remains below 100-day SMA despite hawkish ECB comments, softer USD

• EUR/USD attracts some buyers in reaction to hawkish comments by an ECB board member.
• A positive risk tone undermines the safe-haven USD and further lends support to the major.
• Bets that the Fed will keep rates higher for longer favor the USD bulls and should cap gains

The EUR/USD pair builds on the previous day's modest bounce from the 1.0720 area, or a near three-month low and gains some positive traction for the second successive day on Wednesday. The shared currency strengthens a bid in reaction to hawkish comments by the European Central Bank (ECB) Governing Council Member Isabel Schnabel, which, to a larger extent, offsets a disappointing German macroeconomic picture. Furthermore, hopes for a de-escalation of the crisis in the Middle East drag the safe-haven USD away from its highest level since November 14 touched earlier this week and turn out to be another factor acting as a tailwind for the currency pair.

Any meaningful USD downfall, however, still seems elusive as investors continue to price out bets for early interest rate cuts by the Federal Reserve (Fed) in the wake of a still-resilient US economy. This, along with expectations that the ECB could start cutting interest rates by April amid falling inflation in the Eurozone, caps the upside for the EUR/USD pair. Traders now look forward to the release of the US Trade Balance data ahead of speeches by influential FOMC members for short-term impetus later during the North American session.

Daily Digest Market Movers: Benefits from hawkish ECB comments and modest USD weakness

• ECB board member Isabel Schnabel told the Financial Times that the central bank must be patient with cutting interest rates as inflation could flare up again, which, in turn, offers support to the Euro.
• This follows comments by ECB Governing Council member Boris Vujcic on Tuesday, saying that the central bank shouldn't rush to lower rates as there is resilience in services inflation and wages.
• Data published this Wednesday showed that industrial output in Germany – the Eurozone’s top economy – declined by 1.6% in December as against the -0.4% expected and a 0.7% fall in November.
• The prospect of an Israel-Hamas ceasefire lifts hopes for a de-escalation of the crisis in the Middle East and boosts risk sentiment, undermining the safe-haven US Dollar and benefitting the EUR/USD pair.
• Investors continue scaling back their bets for early and steep rate cuts by the Federal Reserve in the wake of robust US macro data released recently and hawkish comments from several FOMC members.
• Fed Chair Jerome Powell, in an interview with US TV show 60 Minutes aired on Sunday, reiterated that the March policy meeting is likely too soon to have confidence to start cutting interest rates.
• Moreover, Philadelphia Fed President Patrick Harker said on Tuesday that the recent news on inflation has been encouraging, though it must be moving sustainably lower to open the rate-cut door.
• Harker added that it would be a mistake to cut rates prematurely as wage gains are too high to achieve the 2% inflation target and that it is possible that inflation may be more persistent than expected.
• Separately, Minneapolis Fed President Neel Kashkari said that we are not done yet on inflation and most of the disinflationary gains have come from the supply-side, but the data is looking positive.
• The yield on the benchmark 10-year US government bond holds steady above 4.0% and favors the USD bulls, warranting caution before placing fresh bullish bets around the currency pair.
• Traders now look to the US Trade Balance data and speeches by Fed officials for short-term opportunities, though the focus remains on the latest US consumer inflation figures next week.

Technical Analysis: Bulls need to wait for strength beyond 100-day SMA before placing fresh bets

From a technical perspective, the 100-day Simple Moving Average (SMA) support breakpoint, currently pegged around the 1.0775-1.0780 region, might continue to act as an immediate hurdle ahead of the 1.0800 mark. Some follow-through buying has the potential to lift the EUR/USD pair to the 200-day SMA, near the 1.0835-1.0840 zone. The latter should act as a key pivotal point, which if cleared decisively might trigger a short-covering rally and allow spot prices to reclaim the 1.0900 round figure.

On the flip side, immediate support is pegged near the 1.0725-1.0720 region, or a nearly three-month low, ahead of the 1.0700 mark. Some follow-through selling will make the EUR/USD pair vulnerable to accelerate the slide further towards the 1.0665-1.0660 intermediate support en route to the 1.0620-1.0615 region and the 1.0600 round figure.