OCBC’s Christopher Wong notes EUR/USD is holding near 1.16 as a softer US Dollar (USD) and firmer Euro-area data offset higher Oil prices. Strong expectations for a 25bp European Central Bank (ECB) hike and improving Euro-area sentiment are seen limiting Euro downside in the near term, though elevated Oil and political uncertainty in Germany keep risks two-sided ahead of the ECB meeting and US Consumer Price Index (CPI).

Euro steadies as ECB looms

“EUR/USD held up around the 1.16 handle overnight despite the continued rise in oil prices. A softer USD backdrop and firmer euro-area sentiment data offered some support, while markets remain heavily positioned for a 25bp ECB hike this Thursday.”

“Higher energy prices have also complicated the outlook for the ECB’s tightening cycle, with inflation risks becoming less comfortable against a backdrop of only moderate growth. Political uncertainty has edged higher following the AfD’s strong result in Saxony-Anhalt, although the broader implications for federal politics appear contained for now.”

“Firm ECB tightening expectations, together with signs of improving euroarea activity, should help limit EUR downside in the near term, although we remain cautious about chasing the pair higher.”

“EUR last at 1.1620 levels. Mild bearish momentum on daily chart intact while RSI is flat. 2-way risks likely to persist. Support at 1.1560 (100 DMA), 1.1510 (50 DMA). Resistance at 1.1630 (200 DMA), 1.1710 levels.”

“Elevated oil prices remain a two-way risk for the euro, reinforcing inflation and ECB tightening risks while at the same time weighing on the region’s terms of trade and growth outlook. Focus now turns to the ECB meeting and US CPI later this week for the next directional catalyst.”