EUR/USD retreats towards three-month low surrounding 1.0700 as Fed vs. ECB battle intensifies

• EUR/USD fades corrective bounce off multi-day low as Fed hawks gain acceptance.
• Upbeat US data, Fed Beige Book suggest soft landing in the US and favor hawkish Federal Reserve bias.
• Eurozone statistics, ECB comments fail to defend Euro due to unimpressive outcomes, recession woes.
• German Industrial Production, Eurozone GDP and multiple Fed policymakers’ speeches eyed for fresh impetus.

EUR/USD bears stay in the driver’s seat despite late Wednesday’s corrective bounce, declining to 1.0720 amid early Thursday in Asia. In doing so, the Euro pair reverses the previous day’s corrective bounce off the lowest level in three months while bracing for the eighth consecutive weekly loss.

Be it the firmer US statistics or hawkish Federal Reserve (Fed) talks, not to forget the China-linked boost to the haven assets like the US Dollar, the Greenback has it all to justify its recent strength, which in turn keeps the Euro bears hopeful. On the contrary, the mostly downbeat Eurozone statistics join unimpressive statements from the European Central Bank (ECB) Officials to keep suggesting an end of the rate hike cycle in the bloc, which in turn exerts downside pressure on the EUR/USD price.

On Wednesday, German Factory Orders slumped the most since early 2020 with -11.7% YoY figures compared to -4.0% expected and upwardly revised prior numbers of 7.6%. That said, the monthly number also declined heavily with the -10.5% mark versus 3.3% prior (revised from 3.0%). On the same line, Eurozone Retail Sales matched -0.2% MoM market consensus for July versus 0.2% prior while reprinting the -1.0% YoY figure for the said month compared to -1.2% expected.

That said, European Central Bank's (ECB) Governing Council member Francois Villeroy de Galhau again flagged the nearness to the peak rates while adding, “Our options are open at the next and the upcoming rate meetings.”

On the contrary, ECB Governing Council member Klaas Knot told Bloomberg questioned the market’s favor for no rate hike in next week’s monetary policy meeting. ECB’s Knot also added that an economic slowdown is sure to damp demand, though inflation projections won’t differ much from the last round in June. On the same line was ECB policymaker Peter Kazimir who said, per Reuters, that his preferable option would be to raise the policy rate by 25 basis points at the policy meeting next week. ECB’s Kazimir also said that one more, likely last rate hike, still needed.

Talking about the US catalysts, the ISM Services PMI rose to a six-month high of 54.5 in August versus 52.5 expected and 52.7 prior. Further, the final readings of the S&P Global Composite and Services PMIs eased to 50.2 and 50.5 for the said month compared to the initial estimations of 50.4 and 51.0 in that order. It should be noted that all three major constituents of the ISM Services PMI, namely Employment, New Orders and Prices Paid rose notably beyond the previous readings and helped the US Dollar to reverse early-day pullback. Earlier in the week, the US Factory Orders for July dropped to the lowest since mid-2020 but the details about the orders excluding transport, shipments of goods and inventories were impressive to defend the hawkish Fed bias.

On the other hand, Federal Reserve (Fed) Governor Christopher Waller defended hawkish monetary policy during a CNBC interview and Cleveland Federal Reserve President Loretta Mester ruled out rate cuts. However, Federal Reserve Bank of Boston President Susan Collins cited the risk of an overly restrictive stance on monetary policy to suggest the need for a patient and careful, but deliberate, approach. Furthermore, the Fed’s Beige Book also pushed back expectations of witnessing either a policy pivot or rate cut while stating, “US economic growth was modest amid a cooling labor market and slowing inflation pressures in July and August.”

It should be noted downbeat concerns about China, the world’s second-largest economy, also weighed on the sentiment and favored the EUR/USD bears. That said, China’s Caixin Services PMI joined the market’s lack of confidence in the Dragon Nation’s stimulus to spoil the concerns about Beijing. On the same line could be the US-China tension surrounding the trade conditions and Taiwan.

While portraying the mood, S&P 500 Futures remain depressed after Wall Street benchmarks closed in the red for the second consecutive day. That said, the US 10-year Treasury bond yields rose to a two-week high of around 4.30% and the two-year refreshed weekly top above 5.0%, which in turn offered notable strength to the US Dollar.

Looking ahead, Geremany’s Industrial Production for July and the final readings of the Eurozone Gross Domestic Product (GDP) for the second quarter (Q2) will offer immediate directions to the EUR/USD pair ahead of speeches from a slew of Fed policymakers. Additionally, the weekly US Initial Jobless Claims and the quarterly readings of Nonfarm Productivity, as well as the Unit Labor Costs for the second quarter (Q2) will decorate the calendar and should also be important to watch for clear directions.

Technical analysis

While a two-month-old descending support-turned-resistance line restricts immediate EUR/USD upside near 1.0755, the pair’s run-up remains elusive unless it crosses the previous support line stretched from March surrounding 1.0785. That said, May’s bottom of 1.0635 keeps luring the bears.