EUR/USD Outlook: Eyes US CPI for an eventual break through a multi-week-old trading range

• EUR/USD gained some positive traction on Tuesday, though lacked follow-through buying.
• Modest USD weakness turned out to be a key factor that offered some support to the pair.
• Recession fears limited the USD losses and capped the major ahead of the US CPI report.

The EUR/USD pair edged higher on Tuesday amid a relatively quiet trading action and modest US dollar weakness. The New York Fed’s monthly Survey of Consumer Expectations showed on Monday that the inflation outlook declined significantly in July. This pushed back against the idea of a more aggressive policy tightening by the Fed and exerted some downward pressure on the buck. The markets, however, are still pricing in around 70% chances of a 75 bps Fed rate hike move at the September meeting. The bets were lifted by the blockbuster US monthly jobs report released on Friday. Adding to this, Fed Governor Michelle Bowman said on Saturday that the US central bank should consider more 75 bps hikes at coming meetings to bring inflation back down.

This, along with a softer risk tone, helped limit the downside for the safe-haven greenback and kept a lid on any meaningful gains for the EUR/USD pair. The market sentiment remains fragile amid growing worries about a global economic slowdown. Furthermore, the US-China tensions over Taiwan tempered investors' appetite for perceived riskier assets. The shared currency was further capped by energy supply concerns, which could drag the Eurozone economy faster and deeper into recession. In the latest development, the supply of Russian oil to three European countries through Ukraine was suspended as Western sanctions prevented the latter from accepting transit fees. Traders also seem reluctant ahead of the release of the US consumer inflation figures.

The crucial US CPI report is scheduled for release later during the early North American session this Wednesday. The data would be looked upon for fresh clues about the Fed's policy outlook and play a key role in influencing the near-term USD price dynamics. This, in turn, should help determine the next leg of a directional move for the EUR/USD pair. Heading into the key data risk, the final German CPI print might do little to provide any meaningful impetus. Nevertheless, the fundamental backdrop favours bearish traders and suggests that any immediate market reaction to weaker US CPI figures is more likely to be short-lived.

Technical Outlook

From a technical perspective, the EUR/USD pair, so far, has been struggling to break through the 38.2% Fibonacci retracement level of the 1.0787-0.9952 slide. Spot prices, meanwhile, have been showing some resilience below the 23.6% Fibo. level. Furthermore, the range-bound price action witnessed over the past three weeks or so constitutes the formation of a rectangle and points to indecision among traders. Given the recent fall, this might still be categorized as a bearish consolidation phase and supports prospects for further losses.

That said, sustained strength beyond the 1.0280-1.02890 region would negate any near-term negative bias and prompt aggressive short-covering. The EUR/USD pair could then accelerate the move towards the 50-day SMA, currently around the 1.0340-1.0345 area. This is followed by the 50% Fibo. level, around the 1.0365-1.0370 zone, above which bulls might aim to reclaim the 1.0400 mark. Some follow-through buying has the potential to lift spot prices to 1.0465 region, or the 61.8% Fibo. level.

On the flip side, weakness below the 1.0200 round figure might continue to find decent support near the 23.6% Fibo. level, around mid-1.0100s. A convincing break below would expose the 1.0100 mark, which if broken decisively would make the EUR/USD pair. The downward trajectory could eventually drag spot prices back towards the parity mark en-route the YTD low, around the 0.9950 region touched on July 14.