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- EUR/USD struggles to capitalize on the previous day’s positive move beyond the 1.0300 mark.
- China’s COVID-19 woes lend support to the USD and cap the major ahead of FOMC minutes.
- Traders will also look to Wednesday’s release of the flash PMIs from the Eurozone and the US.
The EUR/USD pair regained positive traction on Tuesday and climbed back above the 1.0300 mark, stalling the pullback from a four-and-half-month top. The US Dollar came under some renewed selling pressure and eroded a major part of the previous day’s strong gains to over a one-week high. This, in turn, was seen as a key factor acting as a tailwind for the major. Despite hawkish comments by several Fed officials, investors seem convinced that the US central bank will slow the pace of its rate-hiking cycle. In fact, the current market pricing indicates a greater chance of a relatively smaller 50 bps lift-off at the next FOMC policy meeting in December.
The bets were reaffirmed by Cleveland Fed President Loretta Mester, saying that it makes sense to slow down the pace of rate increases. This led to a further decline in the US Treasury bond yields, which, along with the risk-on impulse, weighed heavily on the safe-haven greenback. The shared currency, on the other hand, drew support from talks for a more aggressive policy tightening by the European Central Bank (ECB). In fact, ECB policymakers – Robert Holzmann and Mario Centeno – backed the case for a third straight 75 bps rate increase at the December ECB policy meeting. This was seen as another factor that provided an additional lift to the EUR/USD pair.
Bulls, however, struggle to capitalize on the momentum and remain on the sidelines through the Asian session on Wednesday. Concerns about economic headwinds stemming from a spike in new COVID-19 cases in China and the imposition of fresh restrictions keep a lid on the optimism. Furthermore, expectations that the Fed will continue to raise borrowing costs to curb inflation acts as a tailwind for the buck and caps the EUR/USD pair. Hence, the market focus will remain glued to the November FOMC meeting minutes, due for release later during the US session. In the meantime, traders will take cues from the flash PMI prints from the Eurozone and the US.
Technical Outlook
From a technical perspective, any subsequent move up is more likely to confront stiff resistance near the very important 200-day SMA. The said barrier is currently pegged just above the 1.0400 round figure and should act as a pivotal point. A sustained strength beyond has the potential to lift the EUR/USD pair back towards the monthly swing high, around the 1.0480 region, touched last week. This is closely followed by the 1.0500 psychological mark, which if cleared decisively will be seen as a fresh trigger for bullish traders. Spot prices might then accelerate the momentum towards reclaiming the 1.0600 mark with some intermediate resistance near the 1.0545-1.0550 zone.
On the flip side, any meaningful pullback below the 1.0300 level might continue to find decent support near the 1.0240-1.0220 region. Some follow-through selling below the 1.0200 round figure will negate any near-term positive outlook and shift the bias in favour of bearish traders. The EUR/USD pair might then turn vulnerable to extend the corrective decline and challenge the 100-day SMA, currently around the 1.0100 mark. A convincing break below the latter will expose the parity mark, below which spot prices could slide to the next relevant support near the 0.9935 area en route to the 0.9900 round-figure mark.
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