• EUR/USD has turned south after disappointing PMI data.
  • Money markets have pared back ECB rate hike bets early Thursday.
  • Focus shifts to US PMI data, FOMC Chairman Powell's testimony.

EUR/USD has declined sharply in the early European session on Thursday and tested the 1.0500 level. The shared currency is having a difficult time finding demand following the disappointing data releases and the pair could extend its slide in case safe-haven flows dominate the markets in the second half of the day.

The monthly data published by S&P Global revealed on Thursday that the business activity in the private sector grew at a softer pace than expected in early June. The Composite PMI for the eurozone and Germany fell to 51.9 and 51.3, respectively, from 54.8 and 53.7. In turn, markets are now pricing in a total of 160 basis points European Central Bank (ECB) rate hikes, compared to 170 bps yesterday.

In the second half of the day, S&P Global will release the Manufacturing and Services PMI data for the US as well. In case these surveys remind investors that the US economy remains relatively healthier when compared to the European economy, market participants could continue to price the policy divergence between the ECB and the Fed. In that case, EUR/USD is likely to continue to push lower. On the other hand, the dollar could lose interest if the US PMI data come in weaker than expected.

While testifying before the Senate Banking Committee, FOMC Chairman Jerome Powell acknowledged that their rate hikes could cause a recession in the US. On a hawkish note, Powell noted that he would not take any specific size of rate hike "off the table." Powell will testify before the House Financial  Services Committee later in the day but his comments are unlikely to trigger a significant market reaction. 

In short, the risk perception should continue to impact the pair's action on Thursday. Unless there is an apparent positive shift in market mood, EUR/USD is likely to remain under bearish pressure.

EUR/USD Technical Analysis

There is a bearish tilt in the short-term outlook with the Relative Strength Index (RSI) indicator on the four-hour chart dropping below 50. Additionally, the latest four-hour candle closed below the 20-period SMA.

On the downside, 1.0470 (Fibonacci 23.6% retracement of the latest downtrend) aligns as the initial support. In case this level turns into resistance, additional losses toward 1.0400 (psychological level) and 1.0380 (the end-point of the latest downtrend) could be witnessed.

1.0520 (Fibonacci 38.2% retracement) forms first resistance before 1.0560 (Fibonacci 50% retracement) and 1.0580 (100-period SMA, 200-period SMA).

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