EUR/USD retests 0.9985 support as Fed bias, doubts over ECB test bulls ahead of US data

• EUR/USD reverses Asian session gains, snaps two-day uptrend.
• US data, yields underpin Hawkish Fed bets, ECB’s rate hike appears slow to reach markets.
• Fears surrounding China, European energy crisis weigh on prices ahead of second-tier US data.
• Final readings of Eurozone inflation data to entertain EUR/USD traders, next week’s FOMC meeting appears the key.

EUR/USD returns to the bear’s table, after a two-day absence, during Friday’s sluggish European morning. That said, the major currency pair prints mild losses as it renews its intraday low around 0.9985. In doing so, the quote reverses the previous day’s upside break of the 21-DMA support amid mixed concerns surrounding the US Federal Reserve (Fed) and the European Central Bank (ECB).

The latest readings of the hawkish Fed bets from the CME’s FedWatch Tool suggest the market priced in the Fed’s 0.75% and 1.0% rate hikes during the next week’s Fed meeting with 77% and 23% chances.

On the other hand, Bloomberg said that a shortage of high-quality assets in the euro area is keeping a lid on short-term borrowing costs, a development that could endanger the European Central Bank’s effort to tighten financial conditions.

Elsewhere, the US 10-year Treasury yields dropped 1.0 basis point (bp) to 3.455% by the press time, after rising 1.38% the previous day. Even so, the negative divergence with the two-year bond yields keeps signaling recession fears and weighing on the EUR/USD prices. That said, the two-year US Treasury bond yields rise to the fresh high since late 2007, to 3.892% by the press time.

It should be noted that the firmer US data propelled the hawkish Fed bets the previous day. That said, the US Retail Sales rose 0.3% in August versus 0.0% expected and July’s revised down -0.4%. Further, NY Fed Empire State Manufacturing Index improved to -1.5 in September compared to -31.3 in August and the market expectation of -13. Alternatively, Philadelphia Fed Manufacturing Index declined to -9.9 for the said month compared to 2.8 expected and 6.2 prior. Additionally, US Industrial Production slid to -0.2% in August versus a market expectation for an expansion of 0.1% and downwardly revised prior to 0.5%.

On the other hand, ECB policymakers like Gabriel Makhlouf, Vice President Luis de Guindos and Mario Centeno all favored the rate hike concerns during their appearances on Thursday.

Moving on, final readings of the Eurozone inflation data for August, expected to confirm the initial forecasts of 9.1% YoY can offer immediate directions ahead of preliminary readings of the Michigan Consumer Sentiment Index (CSI), expected 60 versus 58.2 prior. However, major attention will be given to the economic crisis in China and Europe, which underpins the US dollar’s safe-haven demand, ahead of the Federal Open Market Committee (FOMC) monetary policy meeting.

Technical analysis

Bullish MACD signals and the steady RSI joins the 21-DMA support near 0.9985 to defend EUR/USD buyers before a two-month-old horizontal support region near 0.9945-55.