EUR/USD Sees Modest Recovery Amidst Uncertain Fundamentals

EUR/USD Sees Modest Recovery Amidst Uncertain Fundamentals

Introduction:
The EUR/USD pair is staging a modest recovery from its recent three-month low, as it hovers around the 1.0720 region. This rebound is driven by a combination of factors, including a retreat in US bond yields, profit-taking in the US Dollar (USD), and improved sentiment in equity markets. However, traders remain cautious due to the complex fundamental backdrop that is shaping the currency pair's trajectory.

US Dollar Profit-Taking:
The USD Index (DXY), which measures the USD against a basket of currencies, has pulled back from its highest level since March 9. Bulls are choosing to take profits off the table ahead of significant events, such as China's inflation data and the G20 leaders' summit. This profit-taking has eased some of the upward pressure on the USD and provided support to the EUR/USD pair.

Retreating US Bond Yields:
Another factor contributing to the EUR/USD recovery is the retreat in US Treasury bond yields. Lower yields are often seen as undermining the attractiveness of the USD, and this decline is viewed as a supportive element for the euro. Nevertheless, the market remains aware of the possibility of further policy tightening by the Federal Reserve (Fed), which could limit the extent of USD weakness.

Fed vs. ECB Policies:
Market participants have been pricing in the possibility of one more 25-basis-point rate hike by the Fed before the year's end. This expectation is reinforced by recent economic data, including the lower-than-expected US Weekly Initial Jobless Claims and the upbeat US ISM Services PMI. These factors have painted a picture of a resilient US economy, potentially allowing the Fed to maintain its hawkish stance.

In contrast, European Central Bank (ECB) officials have not provided clear signals about their rate hike path. While some, like Peter Kazimir, advocate for further rate hikes to combat stubbornly high inflation, others, like Ignazio Visco, suggest that the ECB might need to pause rate hikes. This lack of consensus among ECB policymakers adds uncertainty to the EUR's outlook and could dampen bullish sentiment.

Looking Ahead:
Traders are closely watching economic data releases, such as the final German Consumer Price Index (CPI) and French Industrial Production data, for potential market-moving catalysts. In the absence of significant US economic data, the USD's direction will depend on US bond yields and overall risk sentiment.

Conclusion:
The EUR/USD pair is undergoing a modest recovery, but the complex fundamental landscape warrants caution. Despite recent factors supporting the euro, including profit-taking in the USD and lower US bond yields, the path of least resistance remains downwards. Traders are advised to monitor upcoming events closely, particularly the crucial ECB meeting next week, which could provide more clarity on the EUR/USD's future direction.

Our preference

Below 1.0770 with target at1.0680 and 1.0650 in extension.

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