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- EUR/USD stages a goodish recovery on Wednesday amid a sharp USD pullback from a 20-year top.
- Retreating US bond yields and a recovery in the risk sentiment undermined the safe-haven buck.
- Bulls struggle to capitalize on the move as the focus remains on the ECB meeting and Powell’s speech.
The EUR/USD pair witnessed a short-covering bounce on Wednesday and rallied around 135 pips from the vicinity of its lowest level since October 2002. The strong intraday move up lifted spot prices back above the parity mark and was sponsored by a sharp US dollar pullback. Following the recent strong run-up to a 20-year peak, the USD bulls opted to take some profits off the table amid retreating US Treasury bond yields. Apart from this, a late recovery in the US equity markets further undermined the safe-haven greenback. The shared currency further drew support from mostly better-than-anticipated economic releases from the Eurozone.
According to the official data released earlier this Wednesday, German Industrial Production fell by 0.3% in July against the 0.4% decline expected. Furthermore, the Eurozone GDP was revised higher to show a growth of 0.8% during the second quarter of 2022 vs. 0.6% estimated previously. Adding to this, Russian President Vladimir Putin said on Wednesday that Nord Stream 1 is practically shut down and added that we can launch Nord Stream 2 gas pipeline if necessary. This helped ease concerns about an extreme energy crisis in Europe. Furthermore, some cross-driven strength from a sharp move up in the EUR/GBP cross offered additional support to the euro.
The overnight positive move could further be attributed to some repositioning trade ahead of the key central bank event risk, though lacked any follow-through. The EUR/USD pair now seems to have entered a consolidation phase and oscillated in a narrow trading band around the parity mark through the Asian session on Thursday. Investors seem reluctant and prefer to wait for the highly-anticipated European Central Bank (ECB) meeting. The ECB is widely expected to lift interest rates for the second time in as many meetings to curb stubbornly high inflation. Investors, however, remain divided over the size of the hike amid the worsening economic outlook.
The market pricing, meanwhile, indicates a greater chance of a supersized 75 bps increment amid a record high annualized inflation of 9.1% for the Eurozone in August. This increases the risk of disappointment in case the ECB decides to opt for a gradual approach toward raising interest rates. Apart from the decision, the focus will be on the post-meeting press conference, where comments by ECB President Christine Lagarde should infuse some volatility around the euro crosses. Traders on Thursday will also take cues from Fed Chair Jerome Powell's speech, which should influence the USD price dynamics and provide some meaningful impetus to the EUR/USD pair.
Technical Outlook
From a technical perspective, the overnight breakout through an ascending trend-line resistance might have already set the stage for additional gains. Any further move up, however, is likely to confront a barrier near the 1.0050 area ahead of the 1.0080-1.0090 supply zone. Some follow-through buying beyond the 1.0100 mark will suggest that the EUR/USD pair has formed a near-term bottom and pave the way for some meaningful recovery. Spot prices might then climb to the next relevant hurdle near the 1.0165 region before aiming to reclaim the 1.0200 round figure. The momentum could further get extended, though runs the risk of faltering near the 1.0265-1.0275 resistance.
On the flip side, the descending trend-line resistance breakpoint, around the 0.9960-0.9955 region, now seems to protect the immediate downside ahead of the 0.9935 area and the 0.9900 mark. This is followed by a two-decade low, around the 0.9865 zone, which if broken decisively will be seen as a fresh trigger for bearish traders. The EUR/USD pair might then turn vulnerable to slide further towards the 0.9800 round figure. Some follow-through selling below the 0.9770 region has the potential to drag spot prices further towards the 0.9700 mark en route to the 0.9620-0.9610 zone, or the August/September 2002 lows.
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