• EUR/USD has recovered modestly from a multi-month low set below 1.0700.
  • Soft inflation data from Spain doesn't allow the Euro to gather bullish momentum.
  • A risk rally in Wall Street could help the pair limit its losses.

EUR/USD has rebounded above 1.0700 after having touched its weakest level since March 20 at 1.0672 in the early European morning. In case risk flows dominate the financial markets in the second half of the day, the pair could extend its recovery in the short term but investors are unlikely to bet on a persistent Euro strength.

Data from Spain showed on Tuesday that the Harmonized Index of Consumer Prices declined 0.2% on a monthly basis in May. The annual increase in HICP declined to 2.9% in the same period from 3.8%, compared to the market expectation of 3.4%, and forced the Euro to stay under selling pressure. Inflation data from Germany will be published on Wednesday, ahead of the Eurozone HICP figures due Thursday. 

In the meantime, US stock index futures are up between 0.3% and 1% during the European trading hours as markets cheer US President Joe Biden and Republican House Speaker Kevin McCarthy's agreement to suspend the debt-limit on Sunday. The House Rules Committee will meet Tuesday to discuss the bill, which if approved will be voted Wednesday on the floor of the House chamber. Although some Democrats are said to vote against the bill, President Biden will reportedly hold phone calls to get the votes necessary to finalize the deal.

If Wall Street's main indexes open decisively higher and risk flows dominate the action in the second half of the day, the US Dollar could have a hard time preserving its strength, opening the door for additional recovery gains in EUR/USD.

Nevertheless, with markets growing increasingly certain of one more Federal Reserve (Fed) interest-rate hike in June, EUR/USD's upside is likely to remain capped in the near term.

EUR/USD Technical Analysis

EUR/USD trades near the upper-limit of the descending regression channel coming from early May, currently located at around 1.0700. In case the pair stabilizes above that level, 1.0720 (20-period Simple Moving Average (SMA) on the four-hour chart) aligns as interim resistance ahead of 1.0750 (Fibonacci 61.8% retracement level of the latest uptrend). 

If buyers fail to defend 1.0700, additional losses toward 1.0670 (daily low, mid-point of the descending channel) and 1.0640 (lower-limit of the descending channel) could be witnessed. 

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