EUR/USD drops back to parity as DXY bulls cheer risk-aversion, hawkish Fed bets

• EUR/USD takes offers to refresh intraday low, snaps three-day uptrend.
• Yields underpin US dollar run-up amid fears emanating from central banks’ aggression, China.
• Mixed data fails to push back the traders’ hawkish bias as policymakers keep pushing for higher rates.
• Eurozone Unemployment Rate, US ISM Manufacturing PMI should be watched ahead of Friday’s NFP.

EUR/USD bears poke the 1.0000 psychological magnet, also known as the parity level, as traders rush towards the US dollar in search of risk safety. Also underpinning the bearish bias is the US Federal Reserve policymakers’ aggression towards interest rate hikes despite recently mixed data. With this, the major currency pair prints the first daily negatives in four heading into Thursday’s Asian session.

US Dollar Index (DXY) prints the biggest daily gains in over a week while picking bids near 109.10 at the latest. In doing so, the greenback’s gauge versus the six major currencies appears to ignore the softer US ADP Employment Change that grew by 132K versus 288K expected and 270K prior. The reason could be linked to the average wage increases for August that rose 7.6% y/y and the same kept the Fed policymakers hawkish.

Following the data, Cleveland Federal Reserve Bank President Loretta Mester said on Tuesday that she was not anticipating the Fed to cut rates next year, as reported by Reuters. Further, the newly appointed Dallas Fed President Lory Logan joined the lines of hawkish fellow US central bankers while saying, “Restoring price stability is No. 1 priority.”

It should also be noted that the CME’s FedWatch Tool portrays 74.0% chance of a 75 basis points Fed rate hike in September, versus 73.0% the previous day, which in turn offers additional strength to the DXY.

Elsewhere, grim covid conditions in China and the Sino-American tussles over Taiwan appear to exert more downside pressure on the sentiment.

While portraying the mood, US 10-year Treasury yields refresh a two-month high of around 3.21% while the two-year bond coupons jump to the highest levels since 2007, near 3.20% and 3.50% respectively at the latest. Also portraying the sour sentiment is the S&P 500 Futures’ 0.56% intraday fall to the lowest levels since late July, at 3,930 by the press time.

At home, firmer prints of the Eurozone and Germany’s inflation also underpin hawkish bias towards the next week’s European Central Bank (ECB) monetary policy meeting. However, the energy crisis in the old continent and political jitters in Italy and France seem to restrict the Euro from cheering the upbeat catalyst.

For today, Germany’s Retail Sales for August and Eurozone Unemployment Rate may offer immediate directions ahead of the US ISM Manufacturing PMI for the stated month. Also important will be the second-tier data relating to US employment.

Also read: US ISM Manufacturing PMI Preview: Slowing growth or recession?

Technical analysis

A convergence of the 10-DMA and weekly support line, around 0.9995-90, appears a short-term key challenge for EUR/USD bears before they aim for the yearly low near 0.9900. Meanwhile, a downward sloping trend line from February, near 1.0190, restricts the pair’s upside momentum.