EUR/USD clings to mild losses near parity as ECB hawks, Fed’s Powell flex muscles

• EUR/USD treads water after bouncing off 19-year low.
• Anxiety ahead of ECB’s rate hike, Powell’s speech restricts latest moves.
• European energy crisis keeps bears hopeful even if ECB turns hawkish.
• Fed Chair Powell’s capacity to defend rate hikes will be eyed for further US dollar strength.

EUR/USD portrays the typical pre-event anxiety as it takes rounds to 0.9990-1.000 during early Thursday morning in Europe. Also keeping pair traders on the edge is the mixed nature of the latest risk catalysts and sluggish yields of late.

Even so, the quote prints mild losses while fading the previous day’s bounce off the lowest levels since late 2002. The reason could be likely to the traders’ preference for the US dollar amid the rush for risk-safety ahead of the week’s key events, namely the monetary policy meeting by the European Central Bank (ECB) and Fed Chair Jerome Powell’s speech. Also supporting the greenback could be the recent pause in the US Treasury yields, after reversing from the multi-day high, as well as hawkish Fed bets.

US Dollar Index (DXY) pares the biggest daily loss in a month around 109.80 as the US 10-year Treasury yields pause Wednesday’s downside by taking rounds to 3.27%, after taking a U-turn from the highest levels since mid-June. On the other hand, S&P 500 Futures fade bounced off the lowest levels since July 19 as it seesaws around 3,980 by the press time. Additionally, the CME’s FedWatch Tool signals a 77% chance of the Fed’s 75 basis points (bps) rate hike in September, versus 73% marked the previous day.

It should be noted that covid fears emanating from China and the likely escalation in the Sino-American tussles also weigh on the market sentiment and the EUR/USD prices. Recently, Reuters came out with the news stating that Taiwan President Tsai Ing-wen told a delegation of US lawmakers on Thursday that the island will continue to work with the United States to forge closer trade and economic ties. Earlier in the day, the South China Morning Post (SCMP) said, “Shenzhen reduces entry quota for Hong Kong travelers.”

On Wednesday, the market’s optimism spread by the firmer data from the major economies and Fed’s Beige Book, not to forget the mixed Fedspeak, seemed to have triggered the EUR/USD pair’s rebound from the multi-year low.

Looking forward, EUR/USD traders may witness a volatile day wherein the 0.75% ECB rate hike can offer short-term recovery before the fresh downside, in a case where Fed’s Powell sounds hawkish. Overall, the pair is likely to remain on the bear’s radar as the European energy crisis is far from over and hence the ECB’s capacity to tighten monetary policy compared to the Fed is limited.

Also read: ECB Preview: Between Putin's rock and hard inflationary place, the deck is stacked against the euro

Technical analysis

A descending sloping support line from mid-July, near 0.9880 at the latest, restricts immediate EUR/USD downside. The recovery moves, however, need validation from the 20-DMA hurdle, around 1.0025 by the press time.