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- EURUSD remains under some selling for the third successive day and drops to a one-week low.
- China’s COVID-19 woes, geopolitical risks drive haven flow towards the USD and exert pressure.
- Talks for a more aggressive policy tightening by the ECB could limit deeper losses for the Euro.
The EURUSD pair extends last week's retracement slide from a four-and-half-month high and edges lower for the third successive day on Monday. The downtick drags spot prices to a one-week low during the Asian session and is sponsored by some follow-through buying around the US Dollar. The market sentiment remains fragile amid the worsening COVID-19 situation in China and the imposition of fresh lockdowns in several financial hubs – including the capital Beijing and the economic centre Shanghai. Adding to this, fears of a potential escalation in the Russia-Ukraine conflict temper investors' appetite for riskier assets and drives some haven flows towards the safe-haven greenback.
This comes on the back of hawkish signals from several Federal Reserve officials last week, which is seen as another factor offering additional support to the buck. Moreover, the better-than-expected US Retail Sales data released on Thursday cast doubts on the peak inflation narrative and suggested that the Fed might still be far from pausing its policy-tightening cycle. Market participants, however, seem convinced that the US central bank will hike interest rates at a slower pace and have been pricing in a greater chance of a relatively smaller 50 bps lift-off in December. This continues to weigh on the US Treasury bond yields and might cap any further gains for the USD.
Hence, the focus will remain glued to the FOMC monetary policy meeting minutes, due on Wednesday. In the meantime, talks for a more aggressive policy tightening by the European Central Bank (ECB) could lend support to the shared currency and limit the downside for the EURUSD pair. The bets were lifted by ECB President Christine Lagarde's comments on Friday, saying that the central bank is committed to bringing down medium-term inflation to 2% in a timely manner. Lagarde added that the ECB will have to continue raising interest rates to get price pressures back under control. This, in turn, warrants some caution for aggressive traders and before positioning for a deeper pullback.
There isn't any major market-moving economic data due for release on Monday, either from the Eurozone or the US. Hence, traders might take cues from scheduled speeches by ECB’s Member of the Supervisory Board Edouard Fernandez-Bollo and San Francisco Fed President Mary Daly. Apart from this, the broader risk sentiment will influence the USD price dynamics and produce short-term trading opportunities around the EURUSD pair.
Technical Outlook
From a technical perspective, sustained weakness below the 200-hour SMA, around the 1.0270 region, has the potential to drag spot prices further towards the 1.0200 mark. Some follow-through selling should pave the way for an extension of the corrective fall to the 1.0160-1.0155 area en route to the 1.0100 round figure. Failure to defend the said support levels will make the EURUSD pair vulnerable and expose the parity mark.
On the flip side, attempted recovery back above the 1.0300 round figure now seems to confront a hurdle around the 100-hour SMA, currently near the 1.0335 region. A sustained strength beyond should allow bulls to reclaim the 1.0400 mark. This is followed by the very important 200-day SMA, around the 1.0420-1.0425 region, which if cleared decisively will negate any near-term negative bias. The EURUSD pair might then accelerate the momentum towards the monthly peak, around the 1.0480 zone, and aim to conquer the 1.0500 psychological mark.
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