EUR/USD Analysis: Struggles to find acceptance above 1.0600, Eurozone/US PMIs eyed

• EUR/USD staged a solid intraday bounce on Wednesday amid the emergence of some USD selling.
• Aggressive Fed rate hike bets, recession fears acted as a tailwind for the USD and capped the pair.
• Investors now look forward to the flash PMIs from the Eurozone and the US for fresh impetus.

The EUR/USD pair witnessed an intraday turnaround on Wednesday and rallied nearly 140 pips from the 1.0470-1.0465 region, or the weekly low. The momentum – marking the third straight day of a positive move – pushed spot prices to a one-and-half-week high and was sponsored by modest US dollar weakness. The Fed last week forecasted the rate to decline to 3.4% in 2024 and 2.5% over the long run from 3.8% in 2023. This, along with the global flight to safety led by concerns over a possible recession, dragged the US Treasury bond yields lower, which, in turn, acted as a headwind for the USD. Adding to this, less hawkish remarks by Philadelphia Fed President Patrick Harker exerted some downward pressure on the greenback. In an interview with Yahoo Finance Harker said that if demand softens quicker than expected, a 50 bps rate hike for July may be good.

The shared currency drew additional support from expectations that the European Central Bank (ECB) would begin its tightening cycle in July and raise interest rates twice this summer. The bets were reaffirmed during ECB President Christine Lagarde's testimony before the European Parliament earlier this week. Lagarde said that the ECB plans to raise the policy rate by 25 bps next month and also left the door open for another hike at the September meeting. That said, the lack of details about the ECB's fragmentation tool held back bulls from placing aggressive bets. Furthermore, growing acceptance that the Fed would stick to its aggressive policy tightening path and hike interest rates at a faster pace to curb soaring inflation helped limit any deeper USD losses. In fact, the markets have been pricing in another 75 bps rate hike at the next FOMC meeting in July.

Fed Chair Jerome Powell reaffirmed market expectations and said that the ongoing rate increases would be appropriate. Testifying before the Senate Banking Committee, Powell added that Fed is strongly committed to bringing inflation back down and the pace of future rate increases will continue to depend on incoming data. Apart from this, the prevalent cautious mood offered some support to the safe-haven greenback and kept a lid on any meaningful upside for the EUR/USD pair. Spot prices, so far, have struggled to find acceptance above the 1.0600 mark, though have managed to hold steady through the Asian session on Thursday. Market participants now look forward to the release of flash PMI prints from the Eurozone and the US for some meaningful trading impetus.

Traders will further take cues from Fed Chair Jerome Powell's second day of testimony. This, along with the US bond yields and the broader market risk sentiment, will influence the USD price dynamics and produce short-term trading opportunities around the EUR/USD pair.

Technical outlook

From a technical perspective, sustained strength above the 1.0600 mark, leading to a subsequent move beyond the 50-day SMA will add credence to the formation of a bullish double-bottom formation near the 1.0360-1.0350 region. This, in turn, will set the stage for some meaningful upside. The EUR/USD pair might then accelerate the momentum towards the 1.0650 horizontal support breakpoint, now turned resistance, before aiming back to reclaim the 1.0700 round-figure mark. The next relevant hurdle is pegged near the 1.0745-1.0750 region ahead of the May swing high, around the 1.0780-1.0785 zone.

On the flip side, the 1.0550 area now seems to protect the immediate downside ahead of the 1.0525 region. This is closely followed by the 1.0500 psychological mark and the overnight swing low, around the 1.0470-1.0465 zone. A convincing break through the said levels would shift the bias back in favour of bearish traders and make the EUR/USD pair vulnerable. Spot prices could then slide back to the 1.0400 round figure en-route the YTD low, around mid-1.0300s set in May and retested last week. Some follow-through selling would be seen as a fresh trigger for bearish traders and pave the way for a fall towards challenging the 1.0300 mark.