EURUSD: Bears step in and drag the pair below parity

• EURUSD faces some selling pressure and slips back below parity.
• ECB-speak, EMU Retail Sales next of note in the domestic calendar.
• US midterm elections will grab all the attention later on Tuesday.

In light of the recent sharp upside, EURUSD now faces some profit taking and retreats to the area below the parity zone on turnaround Tuesday.

EURUSD: Upside looks capped by 1.0030/40 so far

EURUSD comes under pressure and trades on the defensive reversing at the same time two consecutive daily advances amidst some profit taking sentiment among investors and renewed bid bias in the greenback.

Indeed, the dollar’s recent strong decline appears to have met a foothold around the 110.00 region when gauged by the USD Index (DXY), triggering a corrective bounce soon afterwards.

The pair’s knee-jerk is so far accompanied by an inconclusive session in the German 10-year bund yields, which recede from earlier multi-day peaks near 2.38%.

In the data space, France’s trade deficit widened to €17.49B in September and Retail Sales in Italy expanded 0.5% MoM in the same month. Later in the session, EMU’s Retail Sales are also due. Across the pond, the US midterm elections are expected to take centre stage.

What to look for around EUR

EURUSD faces some selling pressure just past the parity zone, while some recovery in the greenback also puts the recent upside momentum in the pair to the test.

In the meantime, price action around the European currency is expected to closely follow dollar dynamics, geopolitical concerns and the Fed-ECB divergence. The recent decision by the Fed to hike rates and the likelihood of a tighter-for-longer stance now emerges as the main headwind for a sustainable recovery in the pair (if it was any at all).

Furthermore, the increasing speculation of a potential recession in the region - which looks propped up by dwindling sentiment gauges as well as an incipient slowdown in some fundamentals – adds to the fragile sentiment around the euro in the longer run.

Key events in the euro area this week: EMU Retail Sales (Tuesday) – Italy Industrial Production (Thursday) – Germany Final Inflation Rate (Friday).

Eminent issues on the back boiler: Continuation of the ECB hiking cycle vs. increasing recession risks. Impact of the war in Ukraine and the persistent energy crunch on the region’s growth prospects and inflation outlook.

EURUSD levels to watch

So far, the pair is retreating 0.23% at 0.9995 and a breach of 0.9730 (monthly low November 3) would target 0.9704 (weekly low October 21) en route to 0.9631 (monthly low October 13). On the other hand, initial resistance comes at 1.0040 (100-day SMA) seconded by 1.0093 (monthly high October 27) and finally 1.0197 (monthly high September 12).