EUR/USD weakens further below 1.0500 mark, over a three-week low amid stronger USD

• EUR/USD witnessed selling for the third straight day and dropped to over a three-week low.
• Aggressive Fed rate hike bets, the risk-off mood underpinned the USD and exerted pressure.
• The lack of signal for a 50 bps ECB rate hike in September weighed on the common currency.

The EUR/USD pair extended last week's post-ECB bearish breakdown momentum below the 1.0650 support zone and remained under some selling pressure for the third straight day on Monday. The downward trajectory dragged spot prices below the 1.0500 psychological mark, to a three-and-half-week low during the early European session and was sponsored by broad-based US dollar strength.

Stronger US consumer inflation figures released on Friday lifted bets that the Federal Reserve will get more aggressive to cool price pressures. In fact, the markets are now pricing in about 215 bps of cumulative hikes in 2022 and Fed funds futures reflect rising odds of a 75 bps rate hike by July. This, in turn, pushed the yield on the benchmark 10-year US government bond to its highest since May 9. Adding to this, the 2-year Treasury note - seen as a proxy for the Fed's policy rate - rose to 3% for the first time since 2008 and underpinned the greenback.

The prospects for a more aggressive move by major central banks to curb inflation, along with a fresh COVID-19 warning from China, added to worries about the worsening global economic outlook. China on Saturday said that its capital Beijing is experiencing an "explosive" Covid-19 outbreak. This comes on the back of a mini-lockdown in Shanghai - China’s biggest city and a global financial hub - and took its toll on the global risk sentiment. The anti-risk flow was evident from a sea of red across the equity markets, which further benefitted the safe-haven buck.

On the other hand, the shared currency was further pressured by the European Central Bank's conditional outlook for a jumbo rate hike in September. In fact, the ECB did not specify the size of the rate hike and said that it will be dependent on the inflation forecasts at that time. Apart from this, the downfall could further be attributed to some technical selling below the 1.0500 mark. Acceptance below the said handle might have set the stage for additional losses amid the absence of relevant market-moving economic releases, either from the Eurozone or the US.

Technical levels to watch