EUR/USD at Risk of Sub-$1.085 on German Stats and Fed Chair Powell

It is a relatively busy Tuesday for the EUR/USD. German producer price index numbers will be in focus early in the European session.

After the hawkish ECB press conference, we expect increased market sensitivity to the PPIs. While a fall in the producer price index would signal softer inflationary pressures, a decline would also reflect weak demand.

For the EUR/USD, the latest wage growth numbers and sticky core inflation may force the ECB to continue pushing interest rates higher. However, weak demand and aggressive policy moves would raise the threat of an extended German recession.

With inflation in focus, investors should track ECB commentary throughout the day. ECB Executive Board members Andrea Enria, Elizabeth McCaul, and Luis de Guindos are on the calendar to speak today. Hawkish September policy chatter would move the dial.

Early this morning, the PBoC set the tone, cutting Loan Prime Rates. In line with expectations, the PBoC cut the 5-year LPR from 4.3% to 4.2% and the 1-year LPR from 3.65% to 3.55%.

Investors hoped for larger-than-forecast cuts to Loan Prime Rates and a stimulus package from Beijing. The disappointment weighed on riskier assets and the EUR/USD.

EUR/USD Price Action

This morning, the EUR/USD was flat at $1.09211. A mixed start to the day saw the EUR/USD rise to an early high of $1.09263 before falling to a low of $1.09105.

Technical Indicators

Looking at the EMAs and the 4-hourly chart, the EMAs sent bullish signals. The EUR/USD sits above the 50-day EMA ($1.08494). The 50-day EMA pulled away from the 200-day EMA, with the 100-day EMA narrowing to the 200-day EMA, delivering bullish signals.

A hold above the Major Support Levels and the 50-day EMA ($1.08494) would support a breakout from R1 ($1.0943) to give the bulls a run at R2 ($1.0964). However, a fall through S1 ($1.0903) would bring S2 ($1.0886) and the 50-day EMA ($1.08494) into play. A fall through the 50-day EMA would signal a near-term bullish trend reversal.

Resistance & Support Levels

The EUR/USD has to move through the $1.0925 pivot to target the First Major Resistance Level (R1) at $1.0943 and the Monday high of $1.09463. A move through the Monday high would signal a bullish session. However, the EUR/USD needs economic indicators and Fed Chair Powell to support a breakout session.

In the case of an extended rally, the bulls will likely test the Second Major Resistance Level (R2) at $1.0964. The Third Major Resistance Level (R3) sits at $1.1003.

Failure to move through the pivot would leave the First Major Support Level (S1) at $1.0903 in play. However, barring a Fed-fueled sell-off, the EUR/USD pair should avoid sub-$1.0850. The Second Major Support Level (S2) at $1.0886 should limit the downside. The Third Major Support Level (S3) sits at $1.0846.

The US Session

Looking ahead to the US session, it is a quiet day on the US economic calendar. US housing starts and building permits will draw interest. However, we expect the numbers to have a limited impact on the EUR/USD, with Fed Chair Powell’s testimony on Capitol Hill likely to be the key driver.

The markets are betting on interest rate hikes in July and September. Hawkish chatter would support a EUR/USD pullback.

According to the CME FedWatch Tool, the probability of a 25-basis point July rate hike stood at 74.4%, up from 59.9% one week earlier. The chances of the Fed lifting the Fed Funds Rate to 5.75% in September declined from 13.1% to 11.9% over one week.