• Market players cheer easing US inflationary pressures, but optimism begins fading.
  • The European energy crisis keeps escalating, taking its toll on the shared currency.
  • EUR/USD may soon confirm the latest advance was a mere correction.

The EUR/USD pair turned north this past week and surged to 1.0368, its highest in over a month. It later retreated to end the week at around 1.0260. Financial markets enjoyed some temporary optimism, despite underlying issues remaining the same.

What happened?

High-yielding assets rallied on the back of US inflation figures. According to official figures, the Consumer Price Index rose by less than anticipated in July, up 8.5% YoY. The Producer Price Index posted a similar outcome, rising by 9.8% YoY in the same month. The numbers were below the final June readings and also below the market expectations. Speculative interest cheered easing price pressures in the US, which will leave room for the Federal Reserve to soften the pace of tightening and hence, help avoid a steeper economic downturn in the country.

Stock markets soared, and US indexes reached fresh two-month highs, supporting EUR/USD. The rallies faded as US government bond yields resumed their advances, helping the dollar to recover ahead of the weekly close. In fact, the yield curve remains firmly inverted, reaching a record peak of 65 bps difference right after the release of the US CPI.

Where is it going?

However, all is not as simple as it sounds. The US is already in recession, at least technically, given that the Gross Domestic Product contracted for two consecutive quarters. The positive note is that the employment sector remains solid, the down note is that 8.5% annual inflation is nothing to cheer. But at the end of the day, market players are pricing in a 50 bps rate hike for September, and potential economic growth is the reason behind the stock market rally.

In Europe, the focus is on the energy crisis – a result of the Ukraine war. Power prices stand at record highs as the government studies how to limit energy supplies ahead of the winter. Still, there’s a high risk the Old Continent will have to face shortages of natural gas, which powers energy plants and, therefore, cut industrial activity. The economic downturn may have not yet reached Europe but it is knocking at the door.

Data still screams trouble

The EU Sentix Investor Confidence index plummeted in August to -25.2, reflecting concerns about the near future in the Union. On the other hand, Industrial Production rose by 2.4% YoY in June.  The macroeconomic calendar also included the final estimate of July German inflation, which was confirmed at 7.5%, and the preliminary estimate of the US Michigan Consumer Sentiment Index, which improved by more than anticipated, hitting 55.1 in August after plummeting to a record low of 50 in June. The upbeat figure gave the greenback a boost ahead of the weekly close.

The upcoming week will bring a couple of first-tier events, but attention will generally remain on potential recession risks. The EU will publish the second estimate of its Q2 Gross Domestic Product and the final estimate of its July CPI, while the US will release July Retail Sales, foreseen up by a modest 0.1%. Finally, the US Federal Reserve will release the Minutes of its latest monetary policy meeting.

EUR/USD technical outlook

The EUR/USD pair topped at around the 61.8% retracement of its latest daily slide, measured between 1.0614 and 0.9951, at 1.0360. After failing to surpass the area for two consecutive days, it finally gave up and currently trades below the 50% retracement of the same decline at 1.0280.

The long-term picture shows easing bearish pressure but no signs of a potential reversal in the dominant bearish trend. In the weekly chart, technical indicators are recovering within negative levels, still far below their midlines. The inability to break above a critical Fibonacci resistance further supports the long-term bearish case. Also, the 20 SMA maintains a firmly bearish slope far above the current level while below bearish longer ones.

The daily chart shows that EUR/USD has met support around a bullish 20 SMA, which now converges with the next Fibonacci support at 1.0105. However, the 100 SMA has accelerated its downward momentum far above the current level, suggesting the latest advance may end up being corrective. Technical indicators, in the meantime, have turned to the downside just above their midlines, reflecting increasing selling interest at the end of the week.

The first line of buyers stands around the aforementioned 1.0105, with a break below the latter opening the door for a retest of the multi-decade low set this year at 0.9951. Further declines expose a strong static support level at 0.9880. If the pair manages to regain the 1.0280 level, however, the next resistance is 1.0360, while a break above this last should open the door for a steeper recovery towards 1.0440.

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