EUR/USD hovers around 1.0860s as Fed, ECB decisions eyed

The EUR/USD encountered rejection from the 1.0900 psychological barrier for the second day in a row. On Friday, the pair fell to the 1.08657 territory after US data boosted the expected 25 bps rate hike by the Fed next week. At the time of writing, the EUR/USD is trading at 1.0866.

Soft US core PCE increased the likelihood of the Fed lifting 25 bps. Wall Street closed the trading week with upbeat performance, easing worries about recession and instead, Thursday’s data indicated a robust economy, with Q4’s expanding by 2.9% QoQ above estimates of 2.6%, while Q3 remained at 3.2%. That sparked conversations of a possible soft landing by the Fed.

Friday’s data has pointed out that inflation is cooling down at a faster pace than estimated. The Fed’s favourite inflation gauge, the core PCE was aligned with estimates of 4.4% YoY, but below November’s 4.7%.

Speculations around the Fed would reduce the size of rate hikes, as December marked the first lift in rates not being at 75 bps. Instead, Powell and policymakers went for a 50 bps as it was appropriate, as mentioned by them while emphasizing that the pace was not as important as the peak of rates.

University of Michigan reported the US Consumer Sentiment, which improved versus the preliminary reading of 64.6 to 64.9. Data revealed that inflation expectations for 1-year are estimated at 3.9%, lower than the previous poll, while for a 5-year, they stood at 2.9%.

ECB officials reiterated they would raise rates at the upcoming meeting on February 2. ECB’s President Christine Lagarde said that the bank would “stay the course” with a 50-bps rate hike in January and the next meeting after that, although inflation in the Eurozone slid to 9.2%.

Even though the EUR/USD is pressured, the price action from Thursday and Friday formed a series of successive candlesticks with a long bottom wick, suggesting that some buying pressure is inactive.