EUR/USD Outlook: Recession fears and hawkish Fed expectations favour bearish traders

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  • EUR/USD met with a fresh supply on Thursday and was weighed down by a combination of factors.
  • Traders scaled back bets for big ECB rate hikes on dismal Eurozone PMIs and undermined the euro.
  • Hawkish Fed expectations continued acting as a tailwind for the USD and added to the selling bias.
  • The recent slump in the US bond yields capped gains for the USD and helped limit the downside.

The EUR/USD pair witnessed heavy selling on Thursday and dived nearly 100 pips from the daily high in reaction to worse-than-expectation Eurozone PMI data. The S&P Global/BME research’s preliminary report showed that the French economy recorded a notable slowdown in growth at the end of the second quarter and a sharp loss of momentum in the German economy in June. Furthermore, the composite Eurozone PMI indicated that the economic growth is showing signs of faltering and added to growing market worries about a possible recession. This, in turn, forced investors to trim their bets on big rate hike moves by the European Central Bank and heavily on the shared currency.

On the other hand, the US dollar continued drawing support from firming expectations that the Federal Reserve would stick to its aggressive policy tightening path to curb historically high inflation. Apart from this, the cautious market mood benefitted the safe-haven buck and dragged the EUR/USD pair below the 1.0500 psychological mark. That said, the recent steep decline in the US Treasury bond yields kept a lid on any meaningful upside for the greenback and helped limit deeper losses for the major. Worries that the Fed’s commitment to tame red hot inflation would result in slowing economic growth sent the yield on the benchmark 10-year US government bond to an almost two-week low.

This, along with a modest recovery in the global risk sentiment, undermined the USD and assisted the EUR/USD pair to regain some positive traction during the Asian session on Friday. Market participants now look forward to the release of the Germany IFO Business Climate Index for June, which might influence the common currency. Later during the early North American session, traders will take cues from a scheduled speech by St. Louis Fed President James Bullard. Apart from this, the US economic docket, featuring the release of the revised Michigan Consumer Sentiment Index and New Home Sales data could drive the USD. This should produce some trading opportunities around the major.

Technical outlook

From a technical perspective, the overnight downfall reaffirmed a strong barrier near the 1.0600 round-figure mark. The said handle now coincides with the 50-day SMA and should now act as a pivotal point.
Sustained strength beyond would validate the formation of a bullish double-top reversal pattern near the 1.0360-1.0350 area and set the stage for some meaningful upside. The EUR/USD pair might then accelerate the momentum towards the 1.0650 horizontal support breakpoint, now turned resistance, before aiming back to reclaim the 1.0700 round-figure mark. The next relevant hurdle is pegged near the 1.0745-1.0750 region ahead of the May swing high, around the 1.0780-1.0785 zone.

On the flip side, the 1.0500 round figure, followed by the overnight swing low, around the 1.0480 region, now seems to protect the immediate downside. Some follow-through selling would shift the bias back in favour of bearish traders and make the EUR/USD pair vulnerable. Spot prices could then slide to the 1.0400 mark en-route the YTD low, around mid-1.0300s set in May and retested last week. The pair might eventually drop towards challenging the 1.0300 mark.