Sellers remain well in control of European currency sentiment and now force EUR/USD to drop to 2-month lows near 1.0660 on Wednesday.
In response to the Disappointing Prints from the Chinese Calendar earlier on Wednesday, the EUR/USD has extended its sell-off to multi-week lows in the vicinity of the 1.0660 region amid the stronger dollar and in response to its recent sell-off.
In fact, the poor performance of the manufacturing and service sectors in China raises the possibility of an uneven recovery in the country's economy. As a result, investors' expectations of a rapid recovery came crashing down.
Also failing to support the single currency appears in comments from ECB Board member M. Müller, who advocated for at least two more (25 bps) rate hikes. In addition, he deemed "probably too optimistic" about the idea of rate cuts early in 2024. His colleague L. de Guindos also argued that markets absorb QT positively and smoothly.
In the domestic docket, France’s flash Inflation Rate is expected to contract 0.1% MoM in May and rose 5.1% YoY. In Germany, the Unemployment Change increased by 9K people in May, and the Unemployment Rate remained unchanged at 5.6%. Later in the session, advanced German inflation figures will also take center stage, along with President C. Lagarde's Q&A session with students.
In the US, MBA Mortgage Applications are due along with the Fed’s Beige Book and speeches by FOMC members Harker, Jefferson, and Bowman.
EUR/USD sell-off appears unabated and revisits the 1.0660 regions, or a 2-month low, on Wednesday.
In the meantime, the pair’s price action is expected to closely mirror the US Dollar's behavior and will likely be impacted by any differences in approach between the Fed and the ECB with regard to their plans for adjusting interest rates.
Moving forward, a hawkish ECB speaking favors further rate hikes. However, this view appears to contradict some loss of momentum in economic fundamentals in the region.
This week, there have been several key events in the euro area: Germany's Unemployment Change, Unemployment Rate, Flash Inflation Rate, ECB Lagarde (Wednesday) – Germany Retail Sales/Final Manufacturing PMI, EMU Final Manufacturing PMI, Flash Inflation Rate, ECB Lagarde, ECB Accounts (Thursday).
A number of important matters have been put on the back burner, including the continuation of the ECB's hiking cycle in June and July (and perhaps in September as well?). Impact of the Russia-Ukraine War on the growth prospects and the inflation outlook for the next few years. It is possible for inflation to become entrenched in the future.
As of now, the pair is losing 0.66% at 1.0663. It faces initial opposition at 1.0600 (round number), followed by 1.0516 (low March 15), and finally 1.0481 (2023 low January 6). I would not be surprised if we broke above 1.0813 (100-day SMA) and went on to target 1.0881 (55-day SMA) en route to 1.1000 (ground level) on the upside.
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