US Data

According to Friday's data, Unemployment declined to 3.5% in December in the United States, which shows that the Fed has more work to do on the tightening front. However, the rest of the report, along with other releases, have created renewed hopes for a Fed pivot, leading EUR/USD to its best day since mid-November.

The pace of jobs creation continued to decelerate, as the US economy added 223,000 payrolls, from 256,000 previously. Furthermore, average hourly earnings eased to 4.6% y/y and the lowest level of 2022, adding to market optimism that inflation may have peaked.

Other data from Friday showed that factory orders dropped by 1.8% m/m in November, which marked the biggest decline in over two years, while the services sector entered contraction territory in December for the first time since 2020, with a 49.6 PMI print.

Aggressive Fed

The above data fueled expectations for a less aggressive Fed ahead, after last month's downshift to an 0.5% rate hike, from a series of historically large 75 basis points moves. CME's FedWatch Tool assigns the highest probability to rates peaking at 5.00%, also indicating cuts in the back-half of the year. ^[1]

Fed officials are more aggressive though, since they have maintained their hawkish rhetoric and upgraded their expectation for the appropriate policy path In December, now projecting rates to peak at a median of 5.1%.^[2]

More to it, the accounts of the last policy meeting which were published last week, were rather hawkish as well, with "no participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023". ^[3]

Hawkish ECB

The European Central Bank also delivered a smaller rate increase last month, but maintained its aggressive rhetoric and actually out-hawked its US counterpart. The central bank pointed to more tightening ahead and Ms Lagarde talked of raising rates "at a 50-basis-point pace for a period of time", which suggest more than one such move. ^[4]

Markets don't believe that the US Fed officials while raise rates by as much as their projections imply, but appear to be more convinced by the ECB. European policy makers have definitely more ground to cover having started their rate-hike cycle later and from a lower point, but remains to be seen if they can keep tightening, especially if their US counterpart pivots.

EUR/USD Analysis

Friday's economic releases sent EUR/USD higher and extends its gains today, amidst broader risk-on mood and hopes for a less aggressive Fed. Furthermore, a Golden Cross has formed on the daily chart (EMA50 crossing above the EMA200), which can be a precursor of further strength, although more time is needed to assess its validity.

On the H4 chart, EUR/USD maintains its positive bias and has the ability to challenge 1.0787, but may not yet be ready for a bigger advance towards and beyond 1.0942.

On the other hand, the common currency has faltered above the 38.2% Fibonacci of the 2021 high/2022 multi-year low in the recent past. This creates risk for renewed pressure back towards the EMA 200 9at around 1.0500), but a strong catalyst would be required for daily closes below it, that could shift bias to the downside.