• EUR/USD bulls move in following strong US Dollar on Tuesday.
• Eurozone and US data were solid and inflation risks are in vogue. 

The US Dollar rose against all G10 except sterling while EUR/USD was choppy but ultimately 40 pips lower to 1.0637. At the time of writing, EUR/USD is trading at 1.0655 and has stuck to a narrow range of 1.0655/42 so far. 

In Europe, analysts at Westpac explained that Eurozone PMIs showed an outperformance in services which rose to 53.0 (est. 51.0, prior 50.8). However, manufacturing fell to 48.5 (est. 49.3, prior 48.8), the composite rose to 52.3 (est. 50.7, prior 50.3). They explained that the ZEW Survey saw gains in both expectations and current conditions for Germany and the Eurozone. German expectations rose to 28.1 (est. 23.0, prior 16.9), with current conditions of -45.1 (est. -50.5 and prior -58.6). Eurozone expectations rose to +29.7 (prior 16.7), with current conditions of -41.6 (prior -54.8).

The US Dollar held on to modest gains against its peers on Tuesday, supported by strong US economic data. US S&P flash February PMIs were firmer than expected, with services rising to 50.5 (est. 47.3, prior 46.8), manufacturing at 47.8 (est. 47.2, prior 46.9), and the composite at 50.2 (est. 47.5, prior 46.8).

FOMC minutes eyed

The data followed a slew of recent robust data on Retail Sales, the labour market and manufacturing production. This all is suggesting solid momentum and US Treasury yields hit new highs on Tuesday while investors are setting up for a longer-than-anticipated stiff monetary policy stance by the Federal Reserve following a slew of strong economic data. ''This process still has a ways to go, in our view,'' analysts at Brown Brothers Harriman explained. 

The analysts noted that the WIRP suggests 25 bp hikes in March, May, and June that takes Fed Funds to 5.25-5.50%.  ''Given how strong the data have been recently, we see growing risks of a fourth 25 bp hike that takes us up to 5.50-5.75%, though that is not being priced in yet.  This should eventually change,'' the analysts said.

''Strangely enough, an easing cycle is still expected to begin in Q4 but at much lower odds.  Eventually, it should be totally priced out into 2024 in the next stage of Fed repricing.''

Looking ahead, the next major catalyst will be the Federal Reserve's release of the minutes of its last meeting on Wednesday, which will give traders a glimpse of how high officials are projecting interest rates will go following this impressive run of recent data.

''Fed speak before the Feb FOMC meeting and the presser that followed pointed to a more dovish Fed stance. However, strong inflation and labor market data since then have turned Fed speak more hawkish,'' analysts at TD Securities explained. ''The final version of the minutes is likely to somewhat downplay the clear dovishness at the time. Overall, the minutes are likely to be too outdated to impact markets meaningfully.''