EUR/USD Forecast: Seems vulnerable, awaits hawkish FOMC minutes before the next leg down

The EUR/USD pair staged a modest recovery from a fresh monthly low set earlier on Tuesday and ended in the green, snapping a two-day losing streak. The US dollar struggled to preserve its intraday gains to the highest level since late July and settled nearly unchanged, which, in turn, extended some support to the major. A goodish bounce in the US equity markets forced the safe-haven buck to stall its recent rally from a six-week low touched last Thursday in the aftermath of the softer US CPI report. That said, recession fears kept a lid on the optimistic move in the markets, which, along with hawkish Fed expectations, acted as a tailwind for the USD and capped the upside for the pair.

Investors seem convinced that the Fed would stick to its aggressive policy tightening path as inflation remains persistent high. In fact, the markets are still pricing in at least a 50 bps Fed rate hike at the September meeting. Hence, the focus remains glued to the FOMC monetary policy meeting minutes, due for release later during the US session this Wednesday. Investors would look for fresh clues about the possibility of a larger 75 bps move, which would play a key role in influencing the USD price dynamics and help determine the next leg of a directional move for the EUR/USD pair. In the meantime, reluctance to place aggressive bets led to subdued price action during the Asian session.

Heading into the key event risk, traders on Wednesday would take cues from the flash (second estimate) Eurozone GDP print. Later during the early North American session, the US monthly Retail Sales data could drive the USD demand and provide some impetus to the EUR/USD pair. That said, any immediate market reaction is more likely to remain limited. This makes it prudent to wait for strong follow-through buying before confirming that the recent pullback from over a one-month high touched last week has run its course and positioning for any further gains.

Technical Outlook

From a technical perspective, sustained strength beyond the 1.0200 mark might trigger a short-covering move and lift the EUR/USD pair towards the 1.0270-1.0280 static resistance. This is followed by the 1.0300 area, which coincides with the 50-day SMA. A convincing break through the latter should pave the way for additional gains and lift spot prices back towards the monthly peak, around the 1.0365-1.0370 region, en route to the 1.0400 round figure.

On the flip side, weakness below the 1.0155-1.0150 zone could find some support near the overnight swing low, around the 1.0125-1.0120 region, ahead of the 1.0100 mark. Failure to defend the said support levels would be seen as a fresh trigger for bearish traders and expose the parity mark, with some intermediate support near the 1.0040-1.0030 area. The downward trajectory could further get extended and aim to challenge the YTD low, around the 0.9950 region touched on July 14.