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- EUR/USD built on last week’s bounce from a two-decade low amid modest USD weakness.
- Reduced bets for a 100 bps Fed rate hike and sliding US bond yields undermined the buck.
- A positive risk tone also undermined the safe-haven greenback and remained supportive.
- The uptick lacked bullish conviction amid recession fears and ahead of the ECB on Thursday.
The EUR/USD pair kicked off the new week on a positive note and built on its modest recovery move from the vicinity of mid-0.9900s, or the lowest level since December 2002 touched last week. The uptick was sponsored by some follow-through US dollar profit-taking slide, led by diminishing odds for a more aggressive policy tightening by the Federal Reserve. In fact, two of the most hawkish FOMC members – Fed Governor Christopher Waller and St. Louis Fed President Jim Bullard – said last Thursday that they were not in favour of the bigger rate hike at the upcoming meeting in July. The remarks forced investors to scale back their expectations for a supersized 100 bps increase in the benchmark rate. This was evident from a further decline in the US Treasury bond yields, which continued undermining the greenback.
On the economic data front, the US Census Bureau reported on Friday that Retail Sales increased by 1% in June as against the 0.8% rise anticipated. Excluding autos, core retail sales also surpassed market expectations and climbed 1% during the reported month, up from the 0.5% increase in May. Separately, the New York Fed's Empire State Manufacturing Index rebounded sharply from -1.2 in June to 11.1 for the current month, beating expectations for a reading of -2. Furthermore, the Prelim Michigan Consumer Sentiment Index rose to 51.1 in July from the 50.0 previous, though did little to impress the USD bulls. The upbeat data was overshadowed by not-so-hawkish comments by Atlanta Fed President Raphael Bostic, noting that moving too dramatically could undermine positive aspects of the economy and add to the uncertainty.
Adding to this, signs of stability in the financial markets exerted some downward pressure on the safe-haven buck and offered support to the EUR/USD pair. Despite the supporting factors, the pair lacked bullish conviction amid fears that a halt to gas flows from Russia could trigger an economic crisis in the Eurozone. This might curtail the European Central Bank’s ability to raise rates, which acted as a headwind for the shared currency and capped the upside for the major. Hence, the focus will remain glued to the ECB monetary policy decision, scheduled to be announced on Thursday. The ECB has signalled the start of the rate hike cycle and a 25 bps rate hike is fully priced in the markets. The question, however, is whether the central bank commits the size of the rate hike in September or leaves it open.
This, in turn, suggests that investors will look for fresh clues from the accompanying monetary policy statement and ECB President Christine Lagarde's comments at the post-meeting press conference. Apart from this, the flash version of the PMI prints from the Eurozone and the USD should provide a fresh directional impetus for the EUR/USD pair. In the meantime, the USD price dynamics might influence spot prices amid absent relevant market-moving economic releases on Monday. The mixed fundamental backdrop, however, makes it prudent to wait for strong follow-through buying before confirming that the pair have formed a near-term bottom and positioning for any meaningful
recovery move.
Technical outlook
From a technical perspective, the recent leg down stalled near descending trend-channel support extending from May 25. The EUR/USD pair, however, has been struggling to make it through the immediate resistance near the 1.0120-1.0125 region, above which spot prices could aim to reclaim the 1.0200 round-figure mark. Any subsequent move up could still be seen as a selling opportunity and runs the risk of fizzling out rather quickly near the 1.0275 region. The mentioned barrier marks the top end of the descending channel and should now act as a pivotal point. Sustained strength beyond would shift the near-term bias in favour of bullish traders and pave the way for additional gains.
On the flip side, the 1.0000 psychological mark now seems to protect the immediate downside. Some follow-through selling would expose the multi-year low, around the 0.9950 region and the descending channel support, currently near the 0.9920 area. A convincing break below the latter would be seen as a fresh trigger for bearish traders and set the stage for an extension of the recent well-established downtrend.
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