EURUSD remains under pressure amid rising US yields and inflation expectations
- The US dollar has been strengthening against the euro and other major currencies as the market anticipates a faster pace of monetary policy tightening by the Federal Reserve in response to higher inflation and robust economic growth.
- The US 10-year Treasury yield has risen to its highest level since June, reaching 1.54% on Friday, reflecting the increased demand for safe-haven assets and the reduced appetite for riskier assets such as the euro.
- The euro has also been weighed down by the dovish stance of the European Central Bank (ECB), which has signaled that it will maintain its ultra-accommodative monetary policy for longer than the Fed, despite the rising inflationary pressures in the eurozone.
EURUSD rebounds from monthly lows as US dollar takes a breather
- The EURUSD pair experienced a sharp rise on Thursday, rebounding from its lowest daily close of the year so far at 1.0520 and approaching the 1.0600 level. This move was primarily driven by a correction in the US dollar, which took a pause after a prolonged period of gains.
- The market sentiment improved slightly after the US Congress passed a short-term funding bill to avoid a government shutdown, easing some of the political uncertainty that had boosted the demand for the greenback.
- The euro also received some support from the better-than-expected German inflation data, which showed that the annual rate fell from 6.1% to 4.5%, easing some of the concerns about the overheating of the largest economy in the eurozone.
EURUSD faces key resistance at 1.0600 amid mixed signals from technical indicators
- The sharp rebound following the lowest daily close of the year so far has improved the outlook for the euro, although the overall trend remains bearish. A recovery rally could potentially extend to 1.0700 without disrupting the bearish trend.
- On the 4-hour chart, technical indicators suggest a slight upside risk ahead of the Asian session. However, the area around 1.0580 has acted as a strong resistance level. It is a key zone that needs to be surpassed for the euro to pave the way for further gains, initially targeting 1.0600 and then 1.0630.
- Conversely, a consolidation below 1.0550 would increase bearish pressure, exposing support levels at 1.0520 and 1.0495. A break below these levels would confirm the continuation of the downtrend and open the door for a test of 1.0400, which is a multi-year low for the pair.
EURUSD awaits crucial data releases from both sides of the Atlantic
- The key economic release of the week will be the Core Personal Consumption Expenditure Price Index (PCE), which is the Fed’s preferred measure of inflation. If it shows evidence of a rebound in inflation, it could trigger a rally in the US dollar across the board and put more pressure on EURUSD.
- The PCE data will be released on Friday, along with other important indicators such as Personal Income, Personal Spending, Consumer Sentiment, and Chicago PMI. These data will provide more clues about the health and outlook of the US economy, which is expected to grow at a solid pace in Q3 despite some headwinds from supply chain disruptions and labor shortages.
- On Thursday, Eurostat will release the Eurozone Harmonized Index of Consumer Prices (HICP), which is expected to show a decline in both headline and core inflation rates in September. This data will likely reinforce the view that the ECB has more room to keep its policy loose than the Fed, widening the divergence between the two central banks and weighing on EURUSD.
EURUSD outlook remains bearish in Q4 amid growing economic risks
- The EURUSD pair is likely to face more downside risks in Q4, as the US dollar is expected to remain strong on the back of higher interest rates and inflation expectations, while the euro is likely to remain weak on the back of lower growth and inflation prospects.
- The eurozone economy is facing several challenges, such as rising energy prices, supply chain bottlenecks, labor shortages, political uncertainty, and COVID-19 variants. These factors could dampen consumer and business confidence and slow down the recovery momentum in Q4.
- The EURUSD pair could also be influenced by external factors, such as global risk sentiment, trade tensions, geopolitical events, and market volatility. Any of these factors could trigger sudden swings in the pair, especially if they affect the demand for safe-haven assets such as the US dollar