EUR/USD Outlook: Seems vulnerable amid European gas crisis, hawkish Fed rate hike awaited

• A combination of factors dragged EUR/USD to over a one-week low on Tuesday.
• The European gas crisis weighed heavily on the euro amid resurgent USD demand.
• The downside remains cushioned ahead of the highly anticipated FOMC decision.

The EUR/USD pair witnessed aggressive selling on Tuesday and tumbled nearly 150 pips from the daily swing high, around mid-1.0200s. The sharp intraday fall dragged spot prices to over a one-week low and was sponsored by a combination of factors. The shared currency was weighed down by renewed worries over a halt of gas flows from Russia, which could trigger an energy crisis in the Eurozone. In fact, Gazprom announced that the flow through Nord Stream 1 will be cut to 20% of capacity in the next day or two, for an indeterminate time. Though temporary, the supply reduction could drag the region's economy faster and deeper into recession. Apart from this, resurgent US dollar demand exerted additional downward pressure on the major.

The prospects for a global economic downturn continued weighing on investors' sentiment, which was evident from the prevalent risk-off environment. This, in turn, assisted the safe-haven USD to stage a solid rebound from the vicinity of its lowest level since July 5 touched the previous day. Apart from this, a late pickup in the US Treasury bond yields further underpinned the greenback and helped offset mostly disappointing US macro data. The Conference Board's US Consumer Confidence Index fell for the third consecutive month and came in at 95.7 in July, missing estimates. Adding to this, New Home Sales fell 8.1% in June and overshadowed the Richmond Fed Manufacturing Index, which unexpectedly bounced to 0 in July from -11 in the previous month.

The overnight USD move up, however, lacked follow-through amid uncertainty over the Fed's tightening path, which, in turn, offered some support to the EUR/USD pair during the Asian session on Wednesday. The recent softer US economic releases have forced investors to scale back their expectations for more aggressive rate hikes by the US central bank. Hence, the focus will remain glued to the outcome of a two-day FOMC monetary policy meeting, scheduled to be announced later during the US session. The Fed is widely expected to raise interest rates by 75 bps and leave the door open for further hikes. This, along with Fed Chair Jerome Powell's remarks at the post-meeting presser, would influence the USD and provide a fresh impetus to the major.

Heading into the key central bank event risk, traders might take cues from the US Durable Goods Orders data. Apart from this, the US bond yields and the broader market risk sentiment will drive the USD demand, which, in turn, should allow traders to grab short-term opportunities around the EUR/USD pair. The fundamental backdrop, however, seems tilted in favour of bearish traders, suggesting that any intraday move could be seen as a selling opportunity. Hence, it would be prudent to wait for strong follow-through buying before positioning for an extension of the recent recovery from the lowest level since December 2002 touched earlier this month.

Technical Outlook

From a technical perspective, spot prices, so far, have struggled to break through a resistance marked by the top end of a short-term descending trend channel. Furthermore, repeated failures near the 38.2% Fibonacci retracement level of the 1.0787-0.9952 downfall suggest that the recent recovery move might have already run out of steam. Some follow-through selling below the 1.0100 round-figure mark would reaffirm the negative bias and make the EUR/USD pair vulnerable to retesting the parity mark. The downward trajectory could further get extended and force spot prices to challenge the YTD low, around the 0.9950 region.

On the flip side, the 1.0180 region, followed by the 1.0200 mark should now act as an immediate hurdle ahead of the aforementioned descending channel resistance. The latter is currently pegged near the 1.0215-1.0220 supply zone, which if cleared could lift the EUR/USD pair back towards the 38.2% Fibo. level, around the 1.0275-1.0280 region. Sustained strength beyond, leading to a subsequent move above the 1.0300 mark, would be seen as a fresh trigger for bulls. Spot prices could then accelerate the momentum and aim to reclaim the 1.0400 round figure.