EUR/USD looks to close below 1.12 as USD preserves strength

Despite the disappointing macroeconomic data releases from the euro area earlier in the day, the EUR/USD pair held above the 1.12 mark but came under strong bearish pressure in the second half of the day as the Greenback capitalized on the latest developments surrounding the US-China trade dispute. As of writing, the pair was trading at 1.1175, losing 0.33% on a daily basis.

The closely-watched ZEW Economic Sentiment Index in Germany slumped -44.1 in August to miss the market expectation of -21.7 by a wide margin. Similarly, the same reading for the eurozone plummeted to -43.6 from -20.3 in July. Commenting on the data, “The ZEW Indicator of Economic Sentiment points to a significant deterioration in the outlook for the German economy.," noted ZEW President Professor Achim Wambach.

"The most recent escalation in the trade dispute between the US and China, the risk of competitive devaluations, and the increased likelihood of a no-deal Brexit place additional pressure on the already weak economic growth. This will most likely put a further strain on the development of German exports and industrial production.”

USD gains traction on trade optimism

Although the broad-based USD weakness didn't allow the ZEW data to pull the pair lower, the US Trade Representative's office announced the Trump administration's decision to delay additional tariffs on some Chinese imports until December 15 helped the Greenback find demand and weighed on the pair.

The improved market sentiment on renewed trade optimism caused the US 10-year Treasury bond yield to rise sharply and supported the USD's recovery. Moreover, the probability of the Federal Reserve making an aggressive 50 basis points rate cut in September weakened to provide an additional boost to the currency. The US Dollar Index erased all of yesterday's gains and rose to a six-day high of 97.80.

Meanwhile, the data published by the US Bureau of Labor Statistics today showed that annual inflation, as measured by the core Consumer Price Index, rose to 2.2% in July and came in higher than the market expectation of 2.1%.

Tomorrow, economic growth figures from both Germany and the euro area will be watched closely by market participants. The real Gross Domestic Product in Germany is expected to contract by 0.1% in the second quarter and the shared currency is likely to meet a fresh selling wave if the data disappoint.

Technical levels to watch for