EUR/USD bears eye a move into test bullish commitments near 1.0050

• EUR/USD bears are taking on a critical territory to the downside. 
• The euro is out of favour as the US dollar picks up the safe haven flows ahead of the Fed. 

At 1.0122, EUR/USD is lower on the day by some 0.90% at the time of writing, trying to establish a grounding, however, in the recent hour of the New York session. The pair has been pressured from a high of 1.0250 amid a risk-off tone stemming from both sides of the pond.

In the US, risk appetite was squashed on Wall Street. Profit warnings by Walmart and fears of an inflation-led recession in the US economy have sapped flows from stocks and sent them towards US debt instead and the US dollar. At the same time, the International Monetary Fund sliced its outlook for global growth this year which is supportive of the greenback.

Meanwhile, the euro has been hit this week by a poor business sentiment survey in Germany in the wake of the gas crisis. Eurozone growth risks have risen sharply as Russia announced another cut in natural gas shipments. On Monday, Russian energy giant Gazprom said gas flows to Germany through the Nord Stream 1 pipeline would fall to 33 million cubic metres per day from Wednesday, or half of the current flow, which was already at only 40% capacity. Subseqent Kremlin-related commentary has resulted in European Union countries approving a weakened emergency plan to curb their gas demand as they brace for further Russian reductions in supply.

Fed eyed as the next catalyst

The two-day Federal Open Market Committee starts today and the Fed is widely expected to hike rates 75 bp to 2.50%. WIRP suggests only around 15% odds of a 100 bp move. ''With the recent weakness in the data, there is simply no need to go bigger this week,'' analysts at Brown Brothers Harriman argued.

''Updated macro forecasts and Dot Plots won’t come until the September meeting.  Another 75 bp hike on September 21 is about 50% priced in.  A 25 bp hike is fully priced in for November 2 but after that, one last 25 bp hike is only partially priced in.  The swaps market paints a similar picture, with 175 of tightening priced in over the next 6 months that would see the policy rate peak near 3.5%.  After that, an easing cycle is priced in for the subsequent 6 months.''

However, investors will be keeping a close eye on the Fed's forward guidance as it grapples with high inflation and the potential for a recession. ''Yes, the US economic data have been weakening but we do not think a recession is imminent,'' the analysts at BBH said. ''When all is said and done, we believe the US economy remains the most resilient. However, we expect a period of consolidation ahead for the dollar until the US economic outlook becomes clearer.''

As for the European Central Bank, it raised all three of its main policy rates last Thursday, hiking the main refinancing rate from 0.0% to 0.5%, the marginal lending facility rate from 0.25% to 0.75%, and the deposit facility rate from -0.5% to 0.0%. This was the first rate increase in 11 years and the biggest since 2000 and surprised most economists, who had anticipated only a 25-basis-point move. However, despite the ECB’s hawkish surprise last week, the euro remains pressured due to the gas crisis which will make it difficult for the ECB to hike aggressively and can keep the euro hamstrung in the wake of a firmer US dollar. 

EUR/USD technical analysis

The euro is being sent lower to the bottom of the broadening formation's lower boundary and into a price imbalance on the daily chart, as per the greyed areas between 1.0120 and 1.0058. This meets a 61.8% Fibonacci retracement of the prior bullish rally where bulls may look to step in again. On the upside, there is a significant price imbalance between 1.0276 and 1.0416 should the bulls manage to get back in control again.