• Central banks are cautiously moving toward trimming their massive stimulus programs.
  • Growth-related data suggests a steeper deceleration of economic progress.
  • EUR/USD is technically bearish and could reach fresh 2021 lows.

The EUR/USD pair has lost some ground this week, trading in the 1.1700 price zone.  The American dollar enjoyed some temporal demand amid a dismal market mood as the week started with news indicating that one of the largest Chinese property companies, Evergrande, was at risk of default, which could result in a disruption of the country’s financial system. As the week went down, the market’s sentiment improved as news indicated that the company could be split in three, while a unit of the troubled company pledged to make an on-time interest payment.

Global growth under siege

On Friday, the market’s mood took a turn for the worse after rumours that Chinese authorities are asking local governments to prepare for the potential downfall of  Evergrande Group, signaling a reluctance to bail out the company. The dollar found demand again, although it remained below its weekly high of 1.1683 vs. the shared currency.  Concerns about financial disruption in China spilling over a globally weakened economy will likely maintain investors in a cautious mode in the days to come.

In other news, the People´s Bank of China banned crypto trading and related services, labelling them as “illegal.” The news had a limited impact on financial markets but for sure will exacerbate the cautious tone.

The US Federal Reserve had a monetary policy meeting and announced that economic progress in the US gives the central bank the chance to retrieve part of its massive financial support. “If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted,” the statement read.

US policymakers left its current monetary policy unchanged and clarified that trimming its massive stimulus program would not imply a following rate hike. On the latter, the dot plot showed increased chances for a hike in 2022. The announcement was more hawkish than anticipated, with the greenback advancing alongside Wall Street. In the meantime, US Treasury yields surged to their highest since July.

Among other things, US Federal Reserve Chair Jerome Powell noted that they had achieved the Fed’s goal on inflation, while “many” FOMC members believe they also reached the employment goal. For him, it would take one more good jobs report to be convinced of removing stimulus. That comments put all eyes on the Nonfarm Payrolls report that will be released on Friday, October 8.

Across the pond, there was news indicating that ECB policymakers are seeing the risk of inflation exceeding projections, which underpins the case for tapering in the EU, despite the cautious stance from Lagarde & Co.

Tepid data exacerbates a dismal mood

Meanwhile, macroeconomic data released these days added to the poor market’s sentiment. German Producer Prices were up 12.% YoY in August, indicating mounting inflationary pressures. Also, the September IFO Business Climate index fell to 98.8 from 99.4, missing expectations of 100.4.

Markit published the preliminary estimates of its September PMIs. German and EU figures held into expansion territory but sharply contracted from their August readings, also missing the market’s expectations. A similar situation occurred in the US, with the manufacturing index down to 60.5 and the services one to 54.4.

The upcoming week will bring US August Durable Goods Orders, foreseen up 0.6% after falling by 0.1% in the previous month, and CB Consumer Confidence. The country will also publish the final version of Q3 Gross Domestic Product, expected to be confirmed at 6.6% QoQ.  Finally, the country will release the official September ISM Services and Manufacturing PMIs.

The EU and Germany will publish the preliminary estimates of September inflation, while the Union will unveil the Economic Sentiment Indicator for the same month. In addition, Germany will also release August Retail Sales.

EUR/USD technical outlook

The EUR/USD pair is down for a third consecutive week, and it is nearing the yearly low at 1.1663. The weekly chart shows that bears are still in control, given that the pair remains below a bearish 20 SMA, currently around 1.1900. At the same time, the 100 SMA is crossing above the 200 SMA, providing dynamic support at around 1.1600. At the same time, the Momentum indicator bounced from its lows and maintains its upward slope, although within negative levels, while the RSI indicator keeps heading south, currently at around 41.

The risk is skewed to the downside on the daily chart, as the pair develops below all of its moving averages, which maintain their bearish slopes, as technical indicators resumed their declines well into negative territory.

The main support is the mentioned yearly low at 1.1663, with a break below the level exposing the 1.1600 level. Below the latter, the next relevant level to watch is 1.1520. The primary resistance level is 1.1755, the 61.8% retracement of the latest daily advance. Beyond that level, the pair could advance toward 1.1840 and 1.1900.

EUR/USD sentiment poll

The FXStreet Forecast Poll shows that the dollar’s advance will likely continue in the near term, but also that the American currency will likely change course afterwards. Bears account for 64% of the polled experts in the weekly view, but fall to 29% in the monthly perspective, and stand at 35% in the quarterly view. In all the time frames under study, the pair is seen on average holding below the 1.1800 level, somehow signaling lower lows at sight.

In the Overview chart, the three moving averages maintain their bearish slops, reinforcing the idea of another leg south coming shortly.  Worth noting a wide range of possible targets in the long term perspective, which reflect the uncertainty around central banks’ possible moves.

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