EUR/USD steadies near 1.0220 with eyes on German/US inflation amid hawkish Fed bets

• EUR/USD picks up bids to reverse early Asian session losses, stays mildly bid around weekly top.
• DXY tracks sluggish yields even as Fedspeak favors 75 bps rate hike in September.
• Russian oil pipeline halt, softer China inflation underpin recession fears and the US dollar.
• Final readings of Germany’s HICP inflation for July can entertain traders ahead of US CPI.

EUR/USD grinds higher around the daily top surrounding 1.0220 during the early European morning on Wednesday. The major currency pair recently cheered the US dollar rebound but the cautious mood ahead of the inflation numbers from Germany and the US appear to challenge the pair buyers.

Fears of economic slowdown escalated after Russia announced a stoppage of oil flow, due to a halt in the Druzhba pipeline supplying the black gold. “Russia reportedly suspended oil flows via the southern leg of the Druzhba pipeline, amid transit payment issues,” said Reuters.

On the same line were the talks that the US stimulus bill to battle inflation could do little to avoid economic slowdown. “The landmark tax, climate and health-care bill, which passed the Senate on Sunday and is headed for the House on Friday, puts a slimmed-down version of President Joe Biden’s domestic agenda on a path to becoming law after a year of Democratic infighting that the White House was unable to control,” said JP Morgan per Reuters.

Elsewhere, softer prints of China’s inflation for July also weigh on the market’s mood. China’s headline Consumer Price Index (CPI) eases to 2.7% YoY in July versus 2.9% expected and 2.5% prior. Further, the Producer Price Index (PPI) dropped to 4.2% compared to 8.0% market forecasts and 6.1% in previous readings.

Talking about the mood, the US 10-year Treasury yields struggle to extend the previous day’s rebound to 2.79%, around 2.786% by the press time. Also portraying the sluggish market is the S&P 500 Futures that remains unchanged at 4,125 at the latest, despite Wall Street’s losses.

It should be noted that St. Louis Fed President James Bullard said on Tuesday that he wants rates at 4% by the end of the year. This joins recently firmer interest rate futures suggesting nearly 70% odds favoring the 75 basis points (bps) of a Fed rate hike in September.

Looking forward, the final readings of Germany’s Harmonized Index of Consumer Prices (HICP) Inflation data for the said month. However, major attention will be given to the US CPI, expected to ease to 8.7% from 9.1% on YoY, as well as the CPI ex Food & Energy which is likely to rise from 5.9% to 6.1%.

Given the hawkish expectations from the Core CPI, as well as from the Fed, the US dollar may witness further upside in case of the strong inflation prints for July.

Technical analysis

EUR/USD remains above the 21-DMA and a two-week-old support line, respectively around 1.0175 and 1.0150, which in turn keeps buyers hopeful of refreshing the monthly high near 1.0300. However, a downward sloping resistance line from March, close to 1.0330 at the latest, appears a tough nut to crack for the bulls.