EUR/USD dribbles at 20-year low around 0.9700, ECB vs. Fed, Italy’s election results eyed

EUR/USD bears take a breather at the lowest levels since September 2002, around 0.9700 by the press time, amid early Monday morning in Asia. The major currency pair slumped the most in eight days on Friday while refreshing the multi-year low with the 0.9667 number. The latest corrective bounce, however, appears tepid ahead of the key catalysts.

Be it strong US PMIs or the downbeat activity numbers from the bloc, not forget Russia’s fierce warning to the West and the Group of Seven (G7) leaders’ readiness to counter Moscow with sanctions, everything led to the EUR/USD pair’s weakness the previous week. The quote, however, seems to lick its wounds at the multi-year low as exit polls for Italy’s elections suggest an end to the political uncertainty, even if there prevails a little comfort for the right-wing leadership in Italy among some of the European nations, including Germany.

That said, the first readings of September month S&P Global PMIs suggested that the European economy slipped further into contraction, hurt by soaring energy prices. German Services PMI dropped to the two-year low while its counterpart for Europe tested the lowest levels in 19 months. Further, Manufacturing PMIs slumped to the lowest in 20 months. US S&P Global PMIs, on the other hand, were encouraging as the Manufacturing gauge rose to 51.8 from 51.5, while its services counterpart recovered from 44.6 to 49.3 for September.

Elsewhere, Fed Chairman Jerome Powell said on Friday, “We are committed to using our tools.” Following him, Fed Vice Chair Lael Brainard mentioned that inflation is very high and is hitting low-income families ‘hard’. During the weekend, Atlanta Federal Reserve President Raphael Bostic said that he still believes the central bank can tame inflation without substantial job losses given the economy's continued momentum, reported Reuters while quoting the Fed policymaker’s interview on CBS' "Face the Nation".

On a different page, the latest polls for the Italian elections mention that the right-wing alliance led by Giorgia Meloni's Brothers of Italy party looked set for a clear majority in the next parliament, reported Reuters. Ahead of the elections, The Guardian stated that Germany’s governing Social Democratic party warned last week that her win would be bad for European cooperation. Lars Klingbeil, the chairman of Chancellor Olaf Scholz’s SPD, said Meloni had aligned herself with “anti-democratic” figures such as Hungary’s prime minister, Viktor Orbán.

It should be noted that Russia’s warning of using nuclear weapons if needed to battle with the West and the G7 efforts to muster courage against Moscow also weighed on the risk appetite and drowned the EUR/USD prices. “The CBOE Volatility Index, known as Wall Street's fear gauge, on Friday shot above 30, its highest point since late June but below the 37 average level that has marked crescendos of selling in past market declines since 1990,” per Reuters.

Amid these plays, Wall Street closed in the red and US Treasury yields climbed while the US Dollar Index (DXY) also refreshed the multi-year top.

Moving on, Italy’s election results and a speech from European Central Bank (ECB) President Christine Lagarde will be important to watch for intraday moves. However, major attention will be given to the Ukraine-Russia tussles, speeches from Fed Chair Powell and US Durable Goods Orders for clear directions during the week.

Technical analysis

A two-month-old support line near 0.9650 restricts immediate downside of the EUR/USD pair. The recovery moves, however, need validation from a descending support-turned-resistance line, around 0.9830 by the press time, to convince traders.