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EUR/USD Muted as U.S. Yields Soar & IMF Sees Downside Risks for the Euro Area

EUR/USD Muted as U.S. Yields Soar & IMF Sees Downside Risks for the Euro Area

Diego Colman, Market Analyst

EURO – US DOLLAR OUTLOOK:

  • EUR/USD rises 0.10% to 1.0790 in mid-day trading
  • The common currency’s gains are contained by higher U.S. Treasury yields and concerns about the rapid slowdown in Euro Area economic growth resulting from the war in Ukraine
  • Thisarticle looks at the key technical levels for EUR/USD to watch out for in the coming days

Most read: Japanese Yen Technical Analysis - USD/JPY, EUR/JPY, GBP/JPY & AUD/JPY

The EUR/USD bounced modestly on Tuesday, clambering 0.10% to 1.0795 in midday trade, although gains were capped by rising U.S. Treasury rates, with the 10-year yield advancing to 2.92%, its highest level since December 2018.

Today's moves in the bond market come after Federal Reserve officials continued to advocate for aggressive tightening in an effort to restore price stability and credibility. For instance, James Bullard, president of the St. Louis Fed, indicated yesterday that policymakers should frontload hikes expeditiously, called for raising borrowing costs to 3.5% this year and did not rule out the possibility of 75 basis point adjustments in the future, a sign that the central bank could become more hawkish if inflationary pressures do not abate. On balance, the sharp divergence in monetary policy between the FOMC and the ECB should be seen as a tailwind for the U.S. dollar over the medium term.

Elsewhere, concerns about the European Union's economic prospects, following the International Monetary Fund’sgloomy assessment of the bloc, appear to be keeping the common currency’s rebound in check. For context, the IMF slashed Euro Area GDP for 2022 from 3.9% to 2.8% due to shockwaves caused by the war in Ukraine, including soaring energy costs, supply chain disruptions and lower trade activity. Increasing downside risks to the region's growth profile will likely prevent the ECB from being too aggressive and forceful during its normalization cycle despite elevated CPI readings, a situation that could complicate the euro recovery process going forward.

In terms of technical analysis, the EUR/USD bias remains notably bearish, especially after the pair set a new lower low for the year below 1.0800 following a breach of a key rising trendline extended off the 2017 lows. With the balance of risks tilted to the downside, a move towards 1.0730 could be just around the corner. If bears manage to push the exchange rate below this critical floor decisively, selling pressure could intensify, setting the stage for a larger decline, with the 2020 low at 1.0636 being the next focus.

On the flip side, if EUR/USD begins to perk up, we’d need to see significant and sustained gains to neutralize the technical damage caused by the relentless sell-off over the last ten months and to be confident that a meaningful rebound is in gestation. In any case, if buyers return and drive prices higher, the first resistance appears at 1.0820. On further strength, the next hurdle lies at 1.0950, followed by 1.1065, the 50-day simple moving average.

EUR/USD TECHNICAL ANALYSIS

EUR/USD Muted as U.S. Yields Soar & IMF Sees Downside Risks for the Euro Area

EUR/USD chart prepared in TradingView

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---Written by Diego Colman, Contributor

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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