EUR/USD bounces off monthly low to regain 1.0500 amid market’s indecision, Fed in focus

• EUR/USD licks its wounds around three-week low, pares intraday losses of late.
• US dollar cheers risk-aversion wave as hawkish Fed bets, China-linked news weigh on market sentiment.
• Yields dribble around four-year high marked in May, US stock futures eye yearly low.
• Risk catalysts may entertain traders ahead of all-important Fed, ECBSpeak is important too.

EUR/USD picks up bids to consolidate daily losses around 1.0495, staying around the monthly low during a three-day downtrend amid early European morning on Monday. The major currency pair posted the biggest weekly losses since late April by the end of Friday after the US inflation data bolstered expectations of faster/heavier rate hikes by the Fed.

That said, the headline US Consumer Price Index (CPI) rose to 8.6% YoY versus 8.3% expected while the Core CPI jumped 6.0% YoY compared to the expected drop to 5.9% from 6.2% a month earlier. It’s worth noting that the record low of the University of Michigan Consumer Sentiment Index for June, to 50.2 versus revised down 58.1, couldn’t stop the US dollar bulls.

Other than the US inflation numbers, covid fears in China and the Sino-American tussles, recently over Taiwan, also weigh on the EUR/USD prices. Beijing witnessed a jump in the covid numbers during the weekend and recalled some of the virus-led activity restrictions together with the mass testing. Shanghai is on the same line. Recently, Beijing’s local government spokesman Xu Heijian mentioned that a covid outbreak linked to a bar in Beijing is ferocious. Further, China’s Defense Minister Wei Fenghe crossed wires during the weekend stating that China's relationship with the US is at a crossroads. The policymaker also added that they will fight to the end if anyone attempts to secede Taiwan from China. “those who seek Taiwan independence will come to no good end,” said China’s Wei.

At home, multiple European Central Bank (ECB) policymakers likely Madis Muller, Martins Kazaks and Robert Holzmann tried to elaborate on the regional central bank’s 25 bps July rate hike while suggesting that it’s not a strict limit if the inflation remains firmer. It should be noted that Eurozone inflation refreshed its record top in its latest print.

While portraying the mood, the S&P 500 Futures dropped for the fourth consecutive day to refresh a monthly low to around 3,845, down 1.35% by the press time. In doing so, the benchmark US equity futures stay directed towards the yearly low marked in May. Further, the US 10-year Treasury yields rise 2.7 basis points (bps) as buyers attack the four-year low marked in May, around 3.20%.

Looking forward, a light calendar in Europe and the market’s anxiety ahead of Wednesday’s Federal Open Market Committee (FOMC) can keep the EUR/USD prices pressured. However, the CME FedWatch tool shows 26.8% chance of a 75 bp Federal Reserve rate hike at the June 15 meeting, which in turn suggests high hopes, as well as fears of disappointment, suggesting the need for great caution by the pair traders.

Technical analysis

The oversold RSI conditions challenge the pair’s further declines around a 1.5-month-old horizontal support zone, near 1.0470-60.

Alternatively, the corrective pullback may initially aim for the 61.8% and 50% Fibonacci retracements of May 13-30 upside, respectively around 1.0515 and 1.0570.