- EUR/USD scales higher for the third day as receding Fed hike bets keep the USD depressed.
- Geopolitical risks and inflation fears stemming from volatile oil prices could limit USD losses.
- Traders now look forward to FOMC Minutes on Wednesday for some meaningful impetus.
The EUR/USD pair builds on last week’s bounce from the vicinity of the 1.1500 psychological mark and attracts follow-through buyers for the third straight day. The momentum lifts spot prices to a two-month high during the Asian session, with bulls now awaiting a move beyond the 1.1600 round figure before placing fresh bets amid a broadly weaker US Dollar (USD).
The USD Index (DXY), which tracks the Greenback against a basket of currencies, languishes near the lower end of the monthly range as Friday’s weak US data further tempered bets for an immediate rate hike by the Federal Reserve (Fed). In fact, the US Census Bureau reported that Retail Sales fell 0.6% in July, marking the biggest monthly fall since May last year and pointing to a slowdown in consumer spending. This comes on top of signs of moderating price pressures, which gives the US central bank headroom to keep interest rates steady.
Strategists at Scotiabank highlight that the “steepening US 2/30s yield curve, which has reached 108bps, reflects simmering investor concern about the Fed policy outlook alongside weak US fiscal dynamics.” They argue that this “steepening yield curve represents a further headwind for the USD generally,” reinforcing their view that “near-term risks are geared towards the DXY slipping back to the mid-98 area.”
The shared currency, on the other hand, draws support from growing acceptance that the European Central Bank (ECB) will deliver one final 25-basis-point (bps) rate hike at its September meeting as inflation remains above the 2% target. Meanwhile, the US-Iran standoff keeps the geopolitical risk premium in play. Apart from this, inflation fears stemming from volatile oil prices might hold back traders from placing aggressive bearish bets on the USD. This, in turn, might cap any further near-term appreciating move for the EUR/USD pair.
The market focus now shifts to the release of FOMC Minutes, due on Wednesday, which will be looked upon for more cues about the Fed’s future policy path. The outlook will play a key role in influencing the USD price dynamics and producing short-term trading opportunities around the EUR/USD pair. In the meantime, the aforementioned fundamental backdrop suggests that the path of least resistance for spot prices remains to the upside. Hence, any corrective pullback is more likely to be bought into and remain limited.
EUR/USD daily chart
Technical Analysis
The EUR/USD pair holds just above the 50% Fibonacci retracement of the April-June downfall but the broader tone remains capped beneath the 200-day Simple Moving Average (SMA) at 1.1630. This is followed by the 61.8% Fibo. retracement at 1.1645. A daily close above this cluster should open the way toward 1.1732 and 1.1843. On the downside, initial support is aligned with the 50% retracement at 1.1584 and a break below there would expose the 38.2% level at 1.1522, ahead of deeper support at 1.1447 and 1.1324.
