EUR/USD exposes to 1.0300 as Eurozone stares at a recession, Fed Powell’s speech in focus

EUR/USD has taken a sigh around 1.0330 in the Asian session after nosediving from the critical hurdle around 1.0500. The major currency pair is still inside the grip of US Dollar bears and is expected to drag it further toward the round-level support of 1.0300 amid negative market sentiment. The impact of people's unrest against the rollback of COVID-19 lockdown measures has not remained restricted to China. Western economies are also facing significant pressure amid inter-dependency.

Favor for risk aversion theme by the market participants has strengthened the US Dollar Index (DXY). The USD Index has taken a breath after a juggernaut rally around 106.70 and is aiming to extend its gains ahead. While a significant decline in investors’ risk appetite brought a sell-off in S&P500.

Meanwhile, the returns on US treasury bonds have resurfaced after dropping below 3.65%. The 10-year US Treasury yields have rebounded above 3.69% on hawkish commentaries from Federal Reserve (Fed) policymakers over interest rate guidance.

Federal Reserve policymakers see no halt in interest rate hike culture sooner

Undoubtedly, the United States' inflation has shown a meaningful drop in its October report, and market participants have punished US Dollar and US Treasury yields for the same. The headline United States Consumer Price Index (CPI) landed at 7.7%, while core CPI was trimmed to 6.3%. The headline CPI figure is far from the targeted rate of 2%, therefore, consideration of a halt in the interest rate hike by the Federal Reserve (Fed) doesn’t seem lucrative in the near term.

New York Fed Bank President John Williams is favoring pushing the interest rates to a restrictive level solid enough to propel inflation down and holding them till CY2024. Also, Cleveland Fed Bank President Loretta Mester believes that the Federal Reserve is not near to a pause in a rate hike, as reported by Financial Times. She added that more good inflation reports and more signs of moderation are required before building an action plan of pausing rate hikes.

For more meaningful cues on interest rate guidance, the speech from Federal Reserve chair Jerome Powell, scheduled on Wednesday, will be keenly watched.

US Dollar to remain volatile due to multiple economic catalysts

Last week, a light economic calendar kept the US Dollar on the sidelines, but this week is quite different. The US Dollar will face volatility from the releases of Unites States Automatic Data Procession (ADP) Employment data, quarterly Gross Domestic Product (GDP) numbers, core Personal Consumption Expenditure (PCE), ISM Manufacturing PMI, and the Nonfarm Payrolls (NFP) that will be the show-stopper event.

According to the estimates, the United States economy has created additional 208K jobs in November vs. the prior release of 261K. The Unemployment Rate is seen unchanged at 3.7%. Higher interest obligations due to severe policy tightening by the Federal Reserve have forced firms to postpone their expansion plans, which has trimmed the requirements for more manpower. Also, weaker economic projections have led to the utilization of current manpower optimally.

Eurozone stares a recession amid rising interest rates and unfavorable prospects

Inflationary pressures in Eurozone are skyrocketing, and economic development has been stagnant due to supply-chain shocks that fuelled energy prices. While presenting the financial stability report on Monday, European Central Bank (ECB) policymaker and Slovak central bank President Peter Kazimir said that the “risk of recession in the Eurozone is growing.” He further added that the rise in interest rates continues despite unfavorable economic developments.

Adding to it, analysts at Danske Bank have also supported the view citing a recession in the Eurozone seems challenging to avoid. They cornered supply-side shocks, the primary reason behind escalating odds of a recession in the Eurozone. The supply-side shocks set the scene for an extended period of high inflation and lackluster growth. A recession seems difficult to avoid, and we expect GDP to decline by 0.9% in 2023, followed by stagnation in 2024.” This will have significant pressure on the Euro going forward.

Meanwhile, investors are shifting their focus on the release of the Eurozone Harmonized Index of Consumer Prices (HICP), which will release on Tuesday. As per the consensus, the headline HICP will decline to 10.4% vs. the prior release of 10.6%. While the core HICP data that excludes oil and food prices is seen unchanged at 5%.

EUR/USD technical outlook

EUR/USD has declined after forming a ‘Double Top’ chart pattern on a four-hour scale. The formation of the above-mentioned chart pattern indicates a bearish reversal as the asset tested previous highs on Monday around 1.0500 with weak buying interest.

The major currency pair has dropped below the 20-period Exponential Moving Average (EMA) at 1.0360, while the 50-EMA at 1.0277 is still advancing.

Meanwhile, the Relative Strength Index (RSI) (14) has shifted into the 40.00-60.00 range from the bullish range of 60.00-80.00, which signals a loss in the upside momentum.