EUR/USD struggles to defend 1.0200 as sour sentiment teases DXY bulls ahead of US inflation

• EUR/USD remains pressured towards 1.0200 after a two-day uptrend.
• Firmer US data, fears of more pain for Europe due to the Russian energy crisis join pre-CPI anxiety to tease sellers.
• Final readings of Germany’s HICP inflation data for July are also important to watch.
• July month China CPI, PPI could offer immediate directions.

EUR/USD fades the corrective pullback from 1.0202 around 1.0215 as traders turn cautious ahead of the key US Consumer Price Index (CPI) during the initial hour of Wednesday’s Asian session. Also exerting downside pressure on the major currency pair are the economic fears surrounding the Eurozone.

US Dollar Index (DXY) recovered late Tuesday after the firmer US data joined downbeat equities and mildly positive US Treasury yields. Also keeping the greenback positive were fears of the bloc’s recession after Russia’s extra tightening of oil flow.

On Tuesday, US Nonfarm Productivity improved to -4.6% during the second quarter (Q2), -4.7% expected and -7.4% prior, whereas the Unit Labor Cost increased to 10.8% from 12.7% prior and 9.5% market consensus during the said period.

Additionally, Fed's St. Louis president James Bullard said on Tuesday that he wants rates at 4% by the end of the year. This joins nearly recently firmer interest rate futures suggesting nearly 70% odds favoring the 75 basis points (bps) of Fed rate hike in September.

Elsewhere, Russia reportedly suspended oil flows via the southern leg of the Druzhba pipeline, amid transit payment issues.

Amid these plays, the US 10-year Treasury yields regained upside momentum while closing the day around 2.779% while the Wall Street benchmarks also posted losses by the day’s end.

Moving on, China’s CPI and Producer Price Index (PPI) data for July will offer immediate directions to the markets ahead of the final readings of Germany’s Harmonized Index of Consumer Prices (HICP) Inflation data for the said month. However, major attention will be given to the US CPI, expected to ease to 8.7% from 9.1% on YoY, as well as the CPI ex Food & Energy which is likely to rise from 5.9% to 6.1%. Given the hawkish expectations from the Core CPI, the US dollar may witness further upside in case of the firmer inflation print.

Also read: US July CPI Preview: What is the base effect and why it matters

Technical analysis

Despite the latest softness, EUR/USD remains above the 21-DMA and a two-week-old support line, respectively around 1.0175 and 1.0150, which in turn keeps buyers hopeful of refreshing the monthly high near 1.0300. However, a downward sloping resistance line from March, close to 1.0330 at the latest, appears a tough nut to crack for the bulls.