EUR/USD Eases Below 0.99600 Mark Amid Modest U.S. Dollar Rebound, ECB Interest Rate Decision Awaited
- Eur/Usd attracts some selling on Wednesday during the mid-Asian session to snap a four-day winning streak
- Despite the combination of negative factors, expectations of further rate hikes by the FED enabled some U.S. Dollar deep buying, in turn, exerted downward pressure on the Eur/Usd Pair
- Unimpressive flash eurozone PMI adds fuel for a jumbo rate hike by the ECB
- ECB Interest Rate Decision to be released tomorrow
EUR/USD cross attracted some deep selling on Wednesday after sensing a firm rejection from a key resistance level and dragged spot prices lower below the 0.99600 mark during the mid-Asian session and, as of now, seems to have snapped a four-day winning streak. At the time of speaking, the pair is down over 10 pips for the day and looks to build upon the retracement slide heading onto the European session. Uncertainty about the Federal Reserve's policy path has been spreading lately, raising questions about how long the central bank will continue hiking interest rates and by how much they will be increased. This, in turn, was seen as a catalyst that dragged treasury bond yields lower on Tuesday. Additionally, the news of Alphabet's missing earnings as Youtube revenue shrinks and the planned move to cut headcount growth by half in the fourth quarter weighed down on investors' sentiment, which drove flows away toward the Euro.
That said, Some investors have also been concerned about the pace of rate hikes leading to a recession. In fact, On Monday, the S&P Global Composite PMI, which measures activity in the manufacturing and services sector, indicated that the U.S. economy is contracting.
The S&P Global U.S. Manufacturing PMI fell to 49.9 in October of 2022 from 52 in September, well below market forecasts of 51 and marking the sector's first contraction since June 2020. New orders shrank, signalling a renewed decline in demand, with manufacturers highlighting the impact of high inflation and stock building from earlier in the year.
Additionally, The S&P Global U.S. Services PMI dropped to 46.6 in October 2022 from 49.3 in the previous month, and well below market forecasts of 49.2, a preliminary estimate showed. The latest reading signalled the second-fastest fall in business activity in almost two-and-a-half years due to weak client demand and the impact of inflation and higher interest rates. New business fell for the second time in the last three months, with new export orders declining sharply due to challenging economic conditions in key export markets. Further weighing on the U.S. Dollar was the U.S. Conference Board Consumer Confidence Index, which decreased in October after monthly gains. The Index now stands at 102.5 (1985=100), down from 107.8 in September.
Commenting on the report, Lynn Franco, Senior Director of Economic Indicators at The Conference Board, said, "Notably, concerns about inflation—which had been receding since July—picked up again, with both gas and food prices serving as main drivers. Vacation intentions cooled; however, intentions to purchase homes, automobiles, and big-ticket appliances all rose. Looking ahead, inflationary pressures will continue to pose strong headwinds to consumer confidence and spending, which could result in a challenging holiday season for retailers. And, given inventories are already in place, if demand falls short, it may result in steep discounting which would reduce retailers' profit margins." That said, despite the combination of negative factors, expectations of further rate hikes by the FED enabled some U.S. Dollar deep buying from the vicinity of 110.887, which offered some support to the EUR/USD Pair.
On the Eurozone front, the energy crisis and the protracted Russian-Ukraine war continue to deepen the economic downturn in the eurozone area. The fears were further fueled by the rather unimpressive flash Eurozone PMI prints released this Monday. S&P Global reported that business activity in Germany's manufacturing sector continued to contract faster in early October. Additionally, The S&P Global Eurozone Manufacturing PMI fell to 46.6 in October 2022 from 48.4 in September, missing estimates of 47.8 to mark the fourth and sharpest consecutive contraction of the bloc's factory activity. Production fell for the fifth straight period to a 29-month low, constricted by high energy prices. New orders also contracted sharply, declining the most since April 2009, barring the pandemic's start. On the other hand, The S&P Global Services PMI in the Euro Area declined to 48.2 in October 2022 from 48.8 in the previous month and well below, indicating falling business activity levels for three consecutive months. At a rate that was the fastest since February 2021, a preliminary estimate showed. Excluding pandemic lockdown months, the latest reading was the lowest since May 2013.
The reports have confirmed bets for another jumbo 75 bps increase by the European Central Bank in its monetary policy meeting tomorrow. Apart from this, an annual inflation rate figure in the eurozone area of 10% in September from 9.1% in August should solidify bets for tomorrow's jumbo rate hike. As we advance, investors will look for clues from the release of the New Home Sales report for September, and it is expected to show a decrease in new single-family homes sold in September and land at 585 K compared to 685K homes sold in August. The report would influence the near-term USD price dynamics. This, in turn, should assist traders in determining the next leg of a directional move for the EUR/USD pair. That said, the primary focus shifts toward the ECB interest rate decision slated for tomorrow, and it is widely expected the central bank will hike its interest rates by 75bps.
Technical Outlook: One-Day EUR/USD Price Chart
From a technical standstill, using a One-Day price chart price, the price rebounded modestly after strong rejection from a key supply zone ranging from 0.99510 - 0.99999 levels(The former coincides with the upper trendline of the bearish pennant chart pattern plotted from the 10th August 2022 swing high. Subsequent follow-through selling would push the asset to retest the support level (lower trendline of the bearish pennant chart pattern plotted from the 28th September swing low) though the cross would first of all need acceptance below the 50 Exponential Moving Average(EMA)at 0.99169 level for any further downside move. That said, a clean break below the aforementioned support level would be seen as a fresh trigger for bears to continue pushing the price down and pave the way for additional losses.
The RSI(14) level at 57.02 is in positive territory and portrays a bullish filter. The Moving average convergence divergence(MACD) crossover at -0.00600 is below the signal line and portrays a bearish filter. On the other hand, the 20 and 50 Exponential Moving Average(EMA) crossover(Golden Cross) at 1.21359 adds to the overall downside bias.
On the flip side, if buyers and technical traders jump back in and trigger a bullish reversal, initial resistance appears at the 0.99510 resistance level, which coincides with the upper trendline of the bearish pennant chart pattern. If the price pierces this barrier, creating the right conditions for an advance towards the 0.99999 ceilings.
