The batch of EU economic data released on Tuesday curbed the bearish momentum in the Euro that we saw for the Euro in the first half of the day. EURUSD fell to 1.08, but started to recover following the release of upbeat economic data, namely consumer inflation in France, unemployment in Germany, as well as Eurozone GDP for the fourth quarter (preliminary estimate). U.S. labor costs rose at a slightly lower rate than expected, also taking away some steam from the dollar bounce.On Monday and on the first half of Tuesday, currency markets were primarily driven by the data on the European economy and on the quite expected increase in risk aversion in equity markets. Its level has noticeably as a reaction to the expectations of elevated volatility associated with the meetings of the central banks of the US, EU and UK, which will be held on Wednesday and Thursday. Unexpected changes in central banks’ policies could cause significant shifts in market expectations about the rate path and expansion prospects of major economies, and the risk of being on the wrong side is forcing investors to cut risky positions. The main US stock indices closed Monday in the red and today they will likely either continue to decline or consolidate at current levels.Inflation in France, the second largest economy in the EU, slowed to 6% (forecast 6.1%) monthly inflation was 0.4% (forecast 0.5%). Thus, the ECB seemed to have an argument to be more cautious about the tightening policy.The number of unemployed in Germany in January decreased by 15K (forecast +5K). If energy prices stabilize, the labor market will be one of the main sources of inflation. The labor shortage is a leading indicator of price pressure in Germany and in the EU as a whole, which the ECB will certainly pay attention to.However, the most important economic update for the Eurozone economy was the GDP report for the fourth quarter. This is the first GDP estimate for the fourth quarter released by the statistical agency. Nominal output in the economy grew by 1.9% YOY against the forecast of 1.8%:Given the latest data on inflation in the EU economies, the ECB should feel very comfortable – real output and inflation beat expectations on the positive side. However, inflation is still well above the target and the robust recovery in economic growth allows the ECB to remain hawkish, in contrast to the Fed, which will be pressured to adjust policy in light of the signs of economic weakness seen in recent data. This idea lies behind the assumption that EURUSD will extend upside as investors may be willing to price in the narrowing of the real interest rate differential.The Conference Board Consumer Confidence Index is also due today. The indicator is expected to rise slightly, but the currency market is likely to ignore this report in light of the impending storm from the decisions of the central banks.There are no important data releases scheduled ahead of the Bank of England meeting on Thursday. Markets are currently pricing in a 46bp rate hike at this meeting and an additional 25 bp in March. The impact on the pound is expected to be neutral, and the main movement of the GBP/USD is likely to be dictated by the reaction to the FOMC decision. EUR/GBP could hold below 0.8800 until the Super Thursday (ECB and BoE meetings), although the Eurozone inflation data means the pair's balance of risks is tilted to the upside.For EURUSD, the bullish scenario remains likely, as the fundamental picture of the US and the EU, at least in the short term, has changed to the opposite, which allows the ECB to increase tightening, and the Fed, on the contrary, slow down its pace. The target of 1.10 is increasingly looking as market consensus about near-term direction of the pair, today we saw the test of lower bound of the upside channel which means the pair may have finally primed for continuation of the rally:
