EUR/USD forecast: Bears turn cautious near descending channel support, Euro-zone CPI eyed

Following the previous session's attempted bounce, the EUR/USD pair came under some renewed selling pressure on the first day of a new trading week and fell below the 1.0900 handle for the first time since 2017. The shared currency weakened across the board following the release of weaker-than-expected German inflation figures, which showed that the headline CPI is estimated to have slowed to 1.2% yearly rate in September. Tracking the broader HICP, prices are seen contraction 0.1% inter-month and advancing 0.9% on an annualized basis, below 1% expected. The weaker readings were more than enough to offset an improvement in the European unemployment rate, which came in at 7.4% in August - the lowest level since May 2008 - and marked an extension of a sustained downtrend from 11.5% recorded in August 2014.

Stronger USD adds to the bearish pressure

From the US, data released on Monday showed that Chicago PMI fell to 47.1 in September from 50.4 previous, marking its lowest level since Q3 2009, though did little to dent the prevalent bullish sentiment surrounding the US Dollar or lend any support to the major. Against the backdrop of growing optimism over a possible resolution of the prolonged US-China trade disputes, the greenback was further supported by a goodish pickup in the US Treasury bond yields. The USD bulls seemed rather unaffected by the recent domestic political jitters in the form of impeachment proceedings against the US President Donald Trump and a related whistleblower investigation.
 
Nevertheless, the pair ended the day/month to register its biggest quarterly drop since Q2 2018 and remained on the defensive through the Asian session on Tuesday. Market participants now look forward to the final version of Euro-zone PMI prints, which seems unlikely to be a major market mover unless there are sharp revisions. The Euro-zone economic docket also highlights the release of flash inflation figures, expected to show the cost of living rose 1% year-on-year in September. Later during the early North-American session, the US ISM manufacturing PMI might further influence the USD price dynamics and contribute towards producing some short-term trading opportunities.

Short-term technical levels

The short-term technical picture remains tilted in favour of bearish traders, albeit the pair now seems to have found some support near the lower end of a short-term descending trend-channel formation. This coupled with the fact that indicators on 4-hourly/daily charts have moved on the verge of slipping into oversold territory further warrant caution before placing any aggressive bearish bets. However, any attempted recovery move might now confront some fresh supply near the 1.0920 level, which is closely followed by 1.0940 horizontal resistance and the top end of the mentioned trend-channel - around the 1.0955-60 region. Only a sustained breakthrough the trend-channel barrier might negate the near-term bearish outlook and pave the way for any further recovery.
 
On the flip side, the trend-channel support, currently near the 1.0875 region, might continue to protect the immediate downside, which if broken might accelerate the slide further towards May 2017 swing lows - around the 1.0840 region. Failure to defend the said support will confirm a fresh bearish breakdown and set the stage for an extension of the pair's ongoing downward trajectory.