- EUR/USD receded further and flirted with the 200-day SMA.
- The Dollar retreated on the back of strong JPY appreciation.
- Flash PMIs signalled some flattening of business activity in the bloc.
The US Dollar (USD) charted decent losses on Wednesday, especially vs. the Japanese yen, dragging the USD Index (DXY) to the boundaries of the 104.00 level amidst mixed developments in US yields across the spectrum.
In that context, EUR/USD dropped to fresh lows near 1.0820, an area close to the critical 200-day SMA, although it later managed to stage an acceptable comeback and reach the 1.0850 zone amidst marginal gains in German 10-year bund yields.
Extra weakness in the single currency also followed disheartening prints from advanced Manufacturing and Services PMIs in both Germany and the euro bloc for the month of July, showing business activity in the region appears to have met difficulties to rebound further.
Back to monetary policy, a September interest rate cut by the Federal Reserve (Fed) appears fully anticipated, with investors also expecting another reduction in December. In this context, market participants might shift their focus to the US political scene, especially after current Vice President K. Harris garnered significant support to face Republican candidate D. Trump in the November 5 elections.
In the Eurozone, it is worth recalling that the ECB’s Luis de Guindos hinted at a possible interest rate cut in September.
Meanwhile, the policy divergence between the Fed and the ECB is expected to remain almost unchanged going forward, as both central banks are forecast to cut rates after the summer break. However, the steady view of a soft landing in the US economy seems to contrast with some loss of momentum in the Eurozone's economic recovery, all morphing into potential extra weakness in EUR/USD in the latter part of the year.
Looking ahead, key US GDP figures and US PCE data are expected to influence market sentiment in the second half of the week.
EUR/USD daily chart
EUR/USD short-term technical outlook
Next on the downside for EUR/USD emerges the important 200-day SMA of 1.0816 before the June low of 1.0666 (June 26). The breach of the May low of 1.0649 (May 1) could open the door to a probable visit to the 2024 bottom of 1.0601 (April 16).
On the other side, initial resistance appears at the July high of 1.0948 (July 17), seconded by the March top of 1.0981 (March 8) and the critical 1.1000 milestone.
Looking at the big picture, the positive bias should hold if the pair stays above the crucial 200-day SMA.
So far, the four-hour chart indicates that the downturn could have met some decent contention. Nonetheless, the initial resistance is the 55-SMA at 1.0890 ahead of 1.0948, then 1.0981 and 1.1000. On the other side, 1.0825 is first, followed by the 200-SMA at 1.0792, and finally 1.0709. The relative strength index (RSI) decreased to about 36.
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