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- EUR/USD climbs to a two-week high on Friday amid the emergence of fresh USD selling.
- The risk-on impulse seems to be the only factor exerting pressure on the safe-haven buck.
- Bets for more aggressive Fed rate hikes could limit the USD downside and cap the major.
The EUR/USD pair witnessed good two-way price swings on Thursday and finally settled nearly unchanged for the day, around the parity mark. The shared currency struggled to attract buyers after the European Central Bank (ECB) delivered an unprecedented 75 bps rate hike to snuff off record high inflation. It is worth mentioning that the Eurozone CPI surged to 9.1% in August and is expected to rise to double-digits in the coming months. In the accompanying monetary policy statement, the ECB said that it expects to raise interest rates further to dampen demand. The jumbo rate hike, however, was already priced in the markets and hence, did little to provide any meaningful impetus to the shared currency. This, along with the emergence of some intraday US dollar buying, dragged the pair to the 0.9930 area.
Speaking at a Cato Institute conference, Fed Chair Jerome Powell reiterated the central bank's strong commitment to bringing inflation down and warned against prematurely loosening monetary policy. Powell added that the Fed needs to keep going until it gets the job done and reaffirmed market bets for a supersized rate hike at the next FOMC meeting on September 20-21. This, in turn, triggered a fresh leg up in the US Treasury bond yields and provided a modest lift to the greenback. That said, the risk-on impulse, as depicted by a goodish recovery in the US equity markets, acted as a headwind for the safe-haven buck. Furthermore, ECB sources noted that a 75 bps hike in October remains on the table if the inflation outlook warrants an additional big step, assisting the EUR/USD pair to recover early losses.
The recovery momentum extends through the Asian session on Friday and lifts spot prices to a two-week high. The USD comes under renewed selling pressure and retreats further from a two-decade high touched earlier, which, in turn, is seen pushing the EUR/USD pair higher. It, however, remains to be seen if the pair can capitalize on the move amid worries about the gas supply crisis in Europe, which could drag the region's economy faster and deeper into recession. The indefinite shutdown of the Nord Stream 1 pipeline has only raised fears of an imminent worst-case scenario, warranting some caution for bulls. Traders now look forward to ECB President Christine Lagarde's speech, the EU Economic Summit and the Eurogroup meeting for a fresh impetus. Later during the North American session, comments by Fed officials will influence the USD and produce short-term trading opportunities around the major.
Technical Outlook
From a technical perspective, a strength beyond the 38.2% Fibonacci retracement level of the August-September downfall might have already set the stage for additional gains. That said, any subsequent move up is likely to confront stiff resistance near the 50% Fibo. level, around the 1.0115 region. Some follow-through buying has the potential to lift the EUR/USD pair further towards the 1.0175 area, or the 61.8% Fibo. level. This is followed by the 1.0200 round-figure mark, above which spot prices could accelerate the momentum towards the next relevant hurdle near the 1.0265-1.0275 supply zone.
On the flip side, weakness below the 1.0050 area (38.2% Fibo. level) could now be seen as a buying opportunity and remain limited near the parity mark. The latter nears the 23.6% Fibo. level and should act as a pivotal point for intraday traders. A convincing break below could make the EUR/USD pair vulnerable to retesting the overnight swing low, around the 0.9930 region, before eventually dropping to the 0.9900 round figure. The downward trajectory could further get extended towards a two-decade low, around the 0.9865 zone touched earlier this week, which if broken decisively will be seen as a fresh trigger for bearish traders.
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