EUR/USD corrects lower and breaches 0.9800

EUR/USD starts the week on the defensive in the sub-0.9800 region following the tepid bid bias surrounding the greenback.

EUR/USD appears capped around 0.9850, looks to data

EUR/USD adds to Friday’s small downtick and slips back below the 0.9800 support at the end of the Asian trading hours on Monday.

The move lower in the pair comes in tandem with the upbeat sentiment around the dollar, which in turn looks accompanied by a mild downside bias in US yields across the curve. In the same line, the German 10-year bund yields retreat for the third session in a row so far.

In the euro docket, final Manufacturing PMIs are due along with the Eurogroup meeting. Across the pond, the final Manufacturing PMI will precede the key ISM Manufacturing PMI, Construction Spending and speeches by FOMC’s Bostic, Barkin and George.

What to look for around EUR

EUR/USD’s recovery from fresh cycle lows near 0.9350 has so far met a firm resistance area in the mid-0.9800s.

In the meantime, price action around the European currency is expected to closely follow dollar dynamics, geopolitical concerns and the Fed-ECB divergence. The latter has been exacerbated further following the latest rate hike by the Fed and the persevering hawkish message from Powell and the rest of his rate-setters peers.

Furthermore, the increasing speculation of a potential recession in the region - which looks propped up by dwindling sentiment gauges as well as an incipient slowdown in some fundamentals – adds to the sour sentiment around the euro

Key events in the euro area this week: Eurogroup Meeting, Germany, EMU Final Manufacturing PMI (Monday) – ECB Lagarde (Tuesday) – Germany Balance of Trade, EMU, Germany Final Services PMI (Wednesday) – Germany Construction PMI, EMU Retail Sales, ECB Accounts (Thursday) – Germany Retail Sales (Friday).

Eminent issues on the back boiler: Continuation of the ECB hiking cycle. Italian post-elections developments. Fragmentation risks amidst the ECB’s normalization of its monetary conditions. Impact of the war in Ukraine and the persistent energy crunch on the region’s growth prospects and inflation outlook.

EUR/USD levels to watch

So far, the pair is retreating 0.05% at 0.9795 and faces the next support at 0.9535 (2022 low September 28) ahead of 0.9411 (weekly low June 17 2002) and finally 0.9386 (weekly low June 10 2002). On the flip side, the breakout of 0.9853 (weekly high September 30) would target 1.0050 (weekly high September 20) en route to 1.0197 (monthly high September 12).