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- EUR/USD retreated sharply from a six-month high touched after the ECB decision on Thursday.
- The risk-off impulse prompted short-covering around the safe-haven USD and exerted pressure.
- The pullback lacks any follow-through selling amid a more hawkish stance adopted by the ECB.
- Traders now look to the release of flash PMIs from the Eurozone and the US for a fresh impetus.
The EUR/USD pair witnessed good two-way price swings on Thursday and finally settled near the lower end of its daily range, retreating nearly 150 pips from a six-month top. The shared currency strengthened across the board after the European Central Bank (ECB) delivered a widely anticipated 50 bps rate hike, taking its key rates to the highest level since 2008. In the accompanying policy statement, the ECB struck a hawkish tone and indicated that it will need to raise borrowing costs significantly further to tame inflation. The central bank noted that inflation remains far too high and is projected to stay above the target for too long.
Based on new economic projections, inflation is expected to reach 8.4% in 2022, then ease to 6.3% in 2023, 3.4% in 2024, and 2.3% in 2025. Core inflation, excluding energy and food, is projected to be at 3.9% in 2022, 4.2% in 2023, 2.8% in 2024, and then fall to 2.4% in 2025. The ECB also said that it will begin to reduce its balance sheet by €15 billion per month on average from the beginning of March 2023. The impact was immediately felt by the Eurozone's weakest borrowers, pushing the yield on Italy's 10-year bonds higher by 31 bps – the biggest single-day change since March 2020. This, along with looming recession risks, acted as a headwind for the Euro.
Apart from this, a solid intraday US Dollar recovery from its lowest level since June 10, bolstered by a combination of factors, contributed to capping the EUR/USD pair. The Fed on Wednesday signalled that it will continue to raise rates to crush inflation. In fact, the so-called dot plot projected at least an additional 75 bps increase in borrowing costs by the end of 2023 and the terminal rate rising to 5.1%. This, along with a fresh wave of the global risk-aversion trade, provided a strong boost to the safe-haven buck. The prospects for further policy tightening by major central banks added to worries about a deeper global economic downturn and weighed on investors' sentiment.
The EUR/USD pair attracted aggressive selling near the 1.0735 region, though showed resilience below the 1.0600 mark. As the post-Fed/ECB volatility subsides, spot prices manage to regain some positive traction during the Asian session on Friday and climb back to mid-1.0600s. The market focus now shifts to the release of flash PMI prints from the Eurozone and the US. Apart from this, the broader risk sentiment will drive the USD demand and allow traders to grab short-term opportunities on the last day of the week.
Technical Outlook
From a technical perspective, the EUR/USD pair, so far, has been struggling to find acceptance above the 1.0700 mark. Adding to this, the overnight sharp intraday pullback could be seen as the first sign of possible bullish exhaustion. Furthermore, oscillators on the daily chart have moved on the verge of breaking into overbought territory. That said, the emergence of some dip-buying on Friday warrants some caution before confirming that spot prices have topped out. The mixed technical setup points to some near-term consolidation ahead of the year-end holiday season.
In the meantime, a convincing break below the 1.0600 mark might prompt some technical selling, though any subsequent fall could attract some buyers near the 1.0550-1.0545 region. The next relevant support is pegged near the 1.0520 region, which is closely followed by the 1.0500 psychological mark. Some follow-through selling below the latter might expose the 1.0400 horizontal resistance breakpoint and a technically significant 200-day SMA, currently near the 1.0345-1.0340 zone.
On the flip side, the 1.0680-1.0685 region now seems to act as an immediate hurdle ahead of the 1.0700 mark and the overnight swing high, around the 1.0735 area. Bulls need to wait for a sustained strength beyond the latter before positioning for any further gains. The EUR/USD pair might then accelerate the momentum towards reclaiming the 1.0800 mark, with some intermediate resistance near the May 2020 peak, around the 1.0785 level.
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