EUR/USD Seeks Bullish Traction But Still Remains Under Heavy Bearish Pressure Below The 1.07200 Mark

Key Takeaways:

• The EUR/USD pair met fresh demand on Thursday during the Asian session and was supported by various factors
• Retreating Treasury bond yields undermines the greenback, which in turn helps cap the downside for the GBP/USD cross 
• Disappointing Eurozone PMI readings suggest the eurozone bloc could drop into a recession, which weighs on the euro (EUR) 
• Markets await the release of the eurozone GDP (YoY) preliminary data and the U.S. Initial data report for fresh directional impetus 

The EUR/USD cross attracted some buying near the 1.07221 level. It extended the modest recovery from the daily low/1.07190 (1.07190) touched earlier in the session, following an earlier dip from the 1.07275 - 1.07269 region. As of press time, the shared currency is trading in modest gains and has recovered some of its early lost ground but remains under heavy bearish pressure below the 1.07200 mark/two-month low.

The ongoing decline in U.S. Treasury bond yields forced the U.S. dollar to trim further part of its intraday gains, which in turn was seen as a key factor that offered support to the EUR/USD pair. Additionally, a goodish bounce in the U.S. equity markets further undermines the greenback and helps cap the downside for the EUR/USD pair. Further weighing on the buck are the weaker-than-expected U.S. PMI readings released on Wednesday, which pointed to the slowest growth in service activity in the U.S. and the slowest rate of business activity increase in U.S. private sector firms. To a larger extent, the downbeat U.S. PMI readings overshadowed a rise in the value of exports in the U.S. in July compared to imports.

Despite the combination of negative factors, a further uptick seems elusive amid firm market expectations that the Federal Reserve (Fed) will hike interest rates by 25 basis points by the end of this year. This comes against the backdrop of a mixed U.S. monthly job report released on Friday, which indicated a gradual easing of labor market conditions and suggested the Federal Reserve (Fed) will likely leave its Fed Funds rate unchanged during the September meeting.  

Additionally, the euro continues to be weighed down by looming fears of a recession, as eurozone activity declined further than market expectations last month as the euro zone's dominant service sector fell further into contraction territory.

A Markit Economics report on Tuesday showed the HCOB Eurozone Services PMI was revised lower to 47.9 in August 2023 from a preliminary of 48.3, pointing to the first decline in services activity so far this year and the sharpest since February 2021. The Eurozone S&P Global Composite PMI also dropped to 46.7 in August, up from 47.0 in July, and indicated the most significant drop over two years.

As we advance, investors look forward to the U.S. docket featuring the release of last week's initial Jobless Claims data report. Investors will look for cues from releasing the eurozone GDP (YoY) preliminary data report.

Technical Outlook: Four-Hour EUR/USD Price Chart

From a technical standpoint, a further increase in buying pressure will uplift spot prices to tag the 20-day (blue) Exponential Moving Average (EMA) at the 1.07544 level. Acceptance above this EMA level will pave the way for a move toward the 1.07639 resistance level. A decisive flip of this resistance level into a support level will pave the way toward the 50-day (red) EMA level at the 1.07956 level. On further strength, the price would encounter resistance at the 1.08024 level. Buying interest could gain momentum if the price pierces this barrier, creating the right conditions for an advance toward the 1.08756 ceilings. A clean break above this barrier will pave the way for a near-term move toward confronting the technically 200-day solid (yellow) EMA level at the 1.08815 level. A convincing move above this EMA level would negate any near-term bearish outlook and pave the way for aggressive technical buying around the EUR/USD cross.

On the flip side, if dip-sellers and tactical traders jump back in and trigger a bullish reversal, initial support appears at the 1.07018 level. If sellers manage to breach this floor, the price could drop toward the lower limit of the descending channel pattern extending from the mid-August 2023 swing low. A Subsequent (bearish price breakout) break below this support level will reaffirm the bearish thesis and pave the way for more profound losses around the shared currency.