(Haresh Menghani – FXStreet)
– EUR/USD remained on the defensive on Monday and was weighed down by a combination of factors.
– Recession fears continued undermining the euro and acted as a headwind amid modest USD strength.
– The downside seems cushioned as investors might prefer to wait for the crucial FOMC policy decision.
The EUR/USD pair struggled to capitalize on Friday’s goodish rebound from a multi-day low and remained depressed below the 1.0200 mark through the early European session on Monday. The shared currency was weighed down by concerns that a halt of gas flows from Russia could trigger an economic crisis in the Eurozone. It is worth recalling that Russian President Vladimir Putin warned last week that supplies sent via the biggest pipeline to Europe could be reduced further and might even stop. Adding to this, the European Union told member states to cut gas usage by 15% until March as an emergency step. Adding to this, the disappointing release of the flash Eurozone PMIs for July revived recession fears.
On the other hand, the growing risk of a global economic downturn offered some support to the safe-haven US dollar. Apart from this, an uptick in the US Treasury bond yields also underpinned the greenback, which, in turn, was seen as another factor that acted as a headwind for the EUR/USD pair. That said, growing bets that the worsening economic outlook might force the Fed to slow its aggressive policy tightening path kept a lid on any meaningful upside for the buck. Investors also seemed reluctant and preferred to wait on the sidelines ahead of the highly-anticipated FOMC monetary policy decision, scheduled to be announced on Wednesday. This helped limit the downside for the pair, at least for now.
On the economic data front, the headline German IFO Business Climate Index plunged to 88.6 in July as against consensus estimates for a decline to 90.5 from the 92.2 previous. Adding to this, the Current Economic Assessment also dropped to 97.7 for the current month as compared to the 99.4 in June and 98.2 anticipated. Furthermore, the IFO Expectations Index – indicating firms’ projections for the next six months – fell sharply to 80.3 in July from 85.5 in the previous month and missed the forecast of 83.0. The data further pointed to the worsening economic outlook and did little to impress the euro bulls or provide any impetus to the EUR/USD pair, warranting caution for aggressive traders.
Moving ahead, there isn’t any macro data due for release from the US on Monday, leaving the USD at the mercy of the US bond yields. Apart from this, the broader market risk sentiment might influence the USD price dynamics and produce short-term trading opportunities around the EUR/USD pair. Traders, however, might prefer to wait on the sidelines ahead of this week’s key central bank event risk.
From a technical perspective, the recent recovery from the 09950 area, or the lowest level since December 2002 stalled near a descending trend-channel resistance. The mentioned barrier, currently around the 1.0230 region, should now act as a key pivotal point. This is followed by the post-ECB swing high, around the 1.0275-1.0280 area and the 1.0300 round-figure mark. Sustained strength beyond the said hurdles would be seen as a fresh trigger for bulls and pave the way for additional gains. The EUR/USD pair might then accelerate the momentum and aim to reclaim the 1.0400 round-figure mark.
On the flip side, Friday’s swing low, around the 1.0130 region now seems to protect the immediate downside ahead of the 1.0100 mark. A convincing break below the latter would suggest that the recent corrective bounce has run out of steam and negate any near-term positive bias. Some follow-through selling would make the EUR/USD pair vulnerable to breaking below the 1.0100 mark and expose the parity market. The downward trajectory could further get extended back towards challenging the YTD low, around the 0.9950 region.