EUR/USD pushes above 1.0700 amid hawkish ECB vibes despite soft EZ PMIs, focus turns to US data/Fed’s Powell

• EUR/USD has pushed above 1.0700 on Tuesday amid more tailwinds from hawkish ECB commentary.
• The pair is now trading 1.5% higher on the week, despite flash May PMIs printing a little weaker than forecast.
• Focus turns to US PMIs and remarks from Fed’s Powell later in the day as strategists warn about USD dip-buying.

Weaker than forecast Eurozone flash PMI survey data for May has not deterred the euro bulls on Tuesday, given that it (unlike the UK data) still indicated solid underlying growth despite continued high inflationary pressures. Indeed, EUR/USD has been able to reclaim the 1.0700 level on Tuesday, with the pair getting tailwinds from hawkish ECB commentary thus far on the week. At current levels between 1.0710-20, the pair is trading with gains of about 0.25% on the day, taking its gains on the week to around 1.5%.

To recap, in a Monday blog post, ECB President Christine Lagarde said that the ECB would likely lift interest rates into positive territory by the end of Q3, a stance she reiterated in remarks made earlier this Tuesday. Other important ECB players have thrown support behind this shift in stance, including Bank of France head Francois Villeroy de Galhau, though a few of the ECB’s more hawkish members have been reportedly irked by the fact that Lagarde and other “core” ECB members have taken a 50 bps rate rise off of the table. Austria’s Robert Holzmann was on Tuesday pushing for a 50 bps hike in July.

Even if the hawks aren’t satisfied, the euro bulls seem to be. EUR/USD is nearly 3.5% higher versus lows printed earlier in the month in the mid-1.0300s, defying (for now) calls by some analysts for EUR/USD to hit parity in the weeks/months ahead. The recent upturn in the pair also comes despite continued ropey sentiment in the global equity space, which would normally be a headwind given likely USD safe-haven flows.

EUR/USD is now eyeing a test of its 50-Day Moving Average in the 1.0760s and strategists are unsurprisingly questioning how much further the rebound has to run. The major driver of USD gains thus far this year has been the hawkish shift from the Fed and commentary from policymakers last week suggested that they are only getting more hawkish. Fed Chair Jerome Powell is slated to speak at 1620GMT on Tuesday and will likely reiterate the bank’s stance that it is ready to lift interest rates above neutral without hesitation if needed to tame inflation.

That is a far more hawkish stance than that of the ECB and, as a result, FX strategists suspect it won’t be long before the USD bulls return to buy the dip, which likely caps the prospect of a prolonged EUR/USD rebound. Focus will also be on the upcoming release of US flash PMI survey data for May at 1345GMT, which should show growth in the US remains solid and inflationary pressures high.