The EUR/USD pair regains positive traction on Thursday and reverses a major part of the previous day’s retracement slide from the vicinity of a one-week high, around the 1.0765-1.0770 region. However, spot prices remain in a familiar range held since the beginning of the week as traders await the highly-anticipated European Central Bank (ECB) policy meeting during the European session.
Markets had been expecting a pause in the central bank‘s historic policy-tightening cycle in the wake of a darkening economic outlook in the eurozone. Still, a Reuters report suggesting that the ECB could revise its 2024 inflation forecast upwards well past the 3% mark ignited speculation about a potential rate hike. The European Commission has marginally adjusted the inflation rate forecast from 2.8% to 2.9% for 2024, casting doubts on the aggressive inflation predictions. Hence, the pivotal ECB decision will play a key role in influencing the sentiment surrounding the shared currency and provide a fresh directional impetus to the EUR/USD.
In the meantime, the emergence of fresh selling pressure around the US Dollar (USD), led by the uncertainty over the Federal Reserve’s future rate-hike path, turns out to be a key factor acting as a tailwind for the EUR/USD pair. The were no real surprises from the latest US inflation figures, adding to the thesis that the Fed will keep interest rates steady at next week’s policy meeting. The US Bureau of Labor Statistics (BLS) reported that the headline US CPI increased to 3.7% on a yearly basis in August from 3.2% in July, slightly above expectations for a reading of 3.6%. The monthly print, however, matched forecasts and came in at 0.6%.
Meanwhile, the core CPI, which strips out volatile items like food and fuel, matched consensus estimates and rose by the 4.3% YoY rate in August, pointing to a still-sticky inflation. This keeps hopes for one more Fed rate hike move by the end of the year. The current market pricing indicates a more than 50% chance of a 25 bps lift-off in November or December, which could act as a tailwind for the buck and cap gains for the EUR/USD pair heading into the key central bank event risk. Hence, it will be prudent to wait for strong follow-through buying before positioning for an extension of the recent bounce from a multi-month low touched last week.
Technical Outlook
From a technical perspective, any subsequent move up might continue to confront stiff resistance near the 1.0770 region. This is followed by the 1.0800 mark and the very important 200-day Simple Moving Average (SMA) support breakpoint near the 1.0820-1.0825 area. A sustained strength beyond the latter might trigger a short-covering rally and push the EUR/USD pair towards the 1.0900 round figure, which coincides with the 100-day SMA. Some follow-through buying will suggest that spot prices have formed a near-term bottom and shift the bias in favour of bullish traders.
On the flip side, the 1.0710-1.0705 area seems to protect the immediate downside ahead of the 1.0685 area, or a three-month trough set last week. Some follow-through selling will expose the 1.0635 intermediate support before the EUR/USD pair slides further towards the 1.0600 mark. Failure to defend the latter support levels will be seen as a fresh trigger for bearish traders and drag spot prices to the next relevant support near the 1.0525 area (March 8 low) en route to the 1.0500 psychological mark and the year-to-date low around the 1.0480 region touched in January.
