EUR/USD languishes near one-week low, just above mid-1.0500s as traders look to ECB

• EUR/USD edges lower for the third successive day and is pressured by a combination of factors.
• Rising bets for a pause in the ECB’s 14-month-old rate-hiking cycle undermine the shared currency.
• Hawkish Fed expectations, elevated US bond yields and a weaker risk tone benefit the Greenback.
• The setup seems tilted in favour of bearish traders as the focus remains on the ECB rate decision.

The EUR/USD pair remains on the defensive during the Asian session on Thursday and currently trades around the 1.0560 area, or a one-week low as traders keenly await the European Central Bank (ECB) rate decision.

The ECB lifted rates for the 10th straight meeting in September, though signalled that a 14-month-long fight against inflation is nearing the end as price pressures are easing. Furthermore, the economy is slowing to a point that a recession may already be underway, making any further rate hikes increasingly unlikely. Nevertheless, the crucial decision is likely to infuse volatility around the shared currency and provide some meaningful impetus to the EUR/USD pair. 

Apart from this, the focus will be on discussion about a quicker reduction of its oversized portfolio of government debt and how long rates need to stay at record highs. The markets are already betting that the next move will be a rate cut, possibly in the second quarter of next year. Hence, investors will closely scrutinize ECB President Christine Lagarde's remarks at the post-meeting press conference for fresh cues about the central bank's near-term monetary policy outlook.

Heading into the key event risk, a bullish US Dollar (USD), bolstered by elevated US Treasury bond yields and a generally weaker risk tone, is seen exerting some pressure on the EUR/USD pair. The yield on the benchmark 10-year US government bond remains well within the striking distance of a 16-year peak, around the 5% psychological mark briefly breached earlier this week amid growing acceptance that the Federal Reserve (Fed) will stick to its hawkish stance.

The prospects for further policy tightening by the Fed, meanwhile, continue to fuel concerns about headwinds stemming from rapidly rising borrowing costs. Adding to this, lacklustre corporate results raise worries over the economic outlook and tempers investors' appetite for riskier assets. This, along with the risk of a further escalation of the Israel–Gaza conflict, drives some haven flows towards the Greenback and contributes to the offered tone surrounding the EUR/USD pair.

The aforementioned fundamental backdrop seems tilted in favour of bearish traders and suggests that the path of least resistance for spot prices is to the downside. Hence, any attempted recovery move might still be seen as a selling opportunity and run the risk of fizzling out rather quickly.

Technical levels to watch