EUR/USD consolidates the bounce below 1.0050 amid cautious optimism

• EUR/USD holds onto the latest upside but remains below 1.0050.
• US dollar struggles to find demand amid PBOC cuts fuelled optimism.
• The euro looks vulnerable amid the deepening EU energy crisis and growth risks.

EUR/USD is trading better bid while holding above the parity in early Europe on Monday, as the US dollar takes a backseat amid the renewed optimism around China’s stumbling economy.

The People’s Bank of China (PBOC) cut the Loan Prime Rate (LPR), earlier on, to support credit expansion and economic growth, which eased the risk-off pressure and fuelled a pullback in the safe-haven US dollar across the board. The US dollar index retreated from five-week highs of 108.29 to trade at 108.10, at the time of writing.

Despite the latest uptick, the downside risks remain intact for the main currency pair amid hawkish Fed expectations and the worsening European gas crisis. The Fed remains on track to hike the key rates by 50 bps in September amid growth concerns and signs of peak inflation. However, the policy tightening cycle is likely to continue in the coming months, as inflation may not come down any time soon.

Meanwhile, a recession in Germany is inevitable as the European gas crisis deepens, with Russia’s Gazprom announcing on Friday that its Nord Stream 1 pipeline will be shut down from August 31-September 2, as one of the pipeline’s compressors is left for maintenance. The hit to the German industrial sector is likely to be profound amid reduced gas supplies, courtesy of the Russia-Ukraine war.

Also read: Germany's Habeck: A good chance to get through winter without drastic energy measures

The pair now looks forward to the German Bundesbank’s Monthly Economic report amidst a scarce economic docket on both sides of the Atlantic. Tuesday’s Preliminary S&P Global Manufacturing and Services PMIs from the euro area could have a significant impact on the shared currency while the dollar awaits the Jackson Hole Symposium, scheduled in the second half of this week.

EUR/USD: Technical outlook

“The pair is now showing a lot of bearish signs below the 1.0100 level. On the downside,  initial support is near the 1.0020 level. The main support is near the 1.0000 level. A downside break below the 1.0000 support might spark heavy losses. On the upside, the pair is facing resistance near the 1.0080 level. The next major resistance is near the 1.0150 level. A clear move above the 1.0150 resistance might send the pair higher towards the 1.0200 level. To move into a positive zone, the EUR/USD pair must settle above the 1.0200 resistance zone and the 100 simple moving average (red, 4-hours),” Aayush Jindal at TitanFX explains.

EUR/USD: Additional technical levels to watch