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- EUR/USD regains some positive traction on Thursday amid a modest USD downtick.
- Signs of stability in the financial markets seem to weigh on the safe-haven greenback.
- Hawkish Fed expectations, elevated US bond yields should limit losses for the buck.
- Worries about an energy crisis in Europe should cap gains ahead of German/US GDP.
The EUR/USD pair witnessed good two-way price moves on Wednesday and finally settled nearly unchanged for the day. In the absence of any major market-moving economic releases from the Eurozone, the shared currency continues to be weighed down by worries about a deeper economic downturn. Natural gas and electricity prices have spiralled higher in recent weeks to record highs, raising concerns about an extreme energy crisis in Europe. This has been fueling speculations that the region's economy could drop faster and deeper into a recession over the coming months. Apart from this, strong intraday US dollar buying exerted some downward pressure on the major.
Tuesday's knee-jerk reaction to the dismal US PMI prints and weak US home sales data turned out to be short-lived amid expectations that the Fed would stick to its policy tightening path. The bets were reaffirmed by hawkish remarks from Minneapolis Fed President Neel Kashkari, which pushed the yield on the benchmark 10-year US government bond to a two-month high. This, along with mostly upbeat US Durable Goods Orders data, assisted the USD to make a strong comeback and climb back closer to a two-decade high. That said, signs of stability in the financial markets capped the upside for the safe-haven buck and helped limit any further losses for the EUR/USD pair.
Spot prices bounced over 50 pips from the vicinity of the 0.9900 mark – the lowest level since December 2002 touched on Tuesday – and edged higher during the Asian session on Thursday. A modest USD downtick turns out to be a key factor lending support to the EUR/USD pair, though any meaningful recovery still seems elusive. Expectations that Fed Chair Jerome Powell will deliver a more hawkish message at the Jackson Hole symposium on Friday should continue to underpin the greenback and act as a headwind for the major. This makes it prudent to wait for strong follow-through buying before confirming that the pair has bottomed out and positioning for any further gains.
In the meantime, traders on Thursday might take cues from German data – the final Q2 GDP print and the August IFO survey on Business Climate. This, along with the ECB Monetary Policy Meeting Accounts (minutes) might influence the shared currency. The US economic docket features the release of the Prelim (second estimate) Q2 GDP print. Apart from this, the US bond yields and the broader risk sentiment, will drive the USD demand and provide some impetus to the EUR/USD pair. Traders, however, might refrain from placing aggressive bets ahead of the Jackson Hole symposium.
Technical Outlook
From a technical perspective, any subsequent move up is likely to confront some resistance near the 1.0020-1.0025 region. Some follow-through buying might trigger a short-covering rally and lift the EUR/USD pair further towards the 1.0065-1.0070 intermediate hurdle en route to the 1.0100 round-figure mark. This is closely followed by the 1.0130-1.0135 horizontal barrier, which if cleared decisively will set the stage for some meaningful upside in the near term.
On the flip side, the 0.9965 region now seems to protect the immediate downside, below which the EUR/USD pair could drift back to challenge the YTD low, around the 0.9900 round-figure mark. Sustained weakness below the latter will be seen as a fresh trigger for bearish traders and accelerate the fall towards the next relevant support near the 0.9850-0.9845 zone.
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