EUR/USD recovers above 1.0550 in cautious FX market trade as key Fed meeting, NFP data release looms

• EUR/USD has rebounded back to the 1.0550 area and is eyeing a test of short-term range highs near 1.0600.
• But trade in FX markets remains cautious ahead of this week’s Fed meeting and official US jobs report release.
• Against the backdrop of aggressive Fed tightening relative to the slower moving ECB, EUR/USD risks remain tilted to the downside.

Profit-taking in the US dollar ahead of the start of Tuesday’s US trading session has given EUR/USD a moderate lift, with the pair rebounding from earlier lows in the 1.0500 area back to the north of the 1.0550 mark. At current levels in the 1.0560s, the pair is trading with gains of about 0.6% and is eyeing a test of last Friday’s highs just under 1.0600, a level that marks the top of the pair’s recent short-term range.

But a barrage of upcoming risk events later in the week, most notably the Fed policy announcement on Wednesday and release of the official US labour market report on Friday, likely mean that a break back into the 1.0600s is unlikely to happen just yet. Traders/market participants tend to err towards keeping their powder dry ahead of big events in order not to get caught on the wrong side of a big move.

Technicians have marked out the 2020 lows in the 1.0630 area as a key area of resistance to keep an eye on. Against the backdrop of aggressive Fed tightening (they will lift interest rates by 50 bps this week and signal more similar-sized moves ahead) and a still very tight US labour market (as this week’s JOLTS and official jobs data will likely show), betting on a weakening US dollar seems unwise at this point.

Amid expectations that the ECB will not tighten monetary policy nearly as much as the Fed in 2022, EUR/USD risks remain tilted to the downside, strategists continue to argue. Some highlighted comments by ECB Vice President Luis de Guindos over the weekend, who spoke about interest rates not being on a “predetermined” path, which some saw as dovish.

In terms of upcoming risk events, ECB President Christine Lagarde was scheduled to speak earlier in the day and, though she hasn’t said anything on policy yet, may do later in the day. Meanwhile, the March JOLTs Job-Opening report will be released at 1500 BST later on Tuesday and could trigger some short-term volatility in FX markets.