EUR/USD remains defensive above 1.0950, ECB Economic Bulletin, US inflation eyed

• EUR/USD remains sidelined after snapping a two-day losing streak the previous day.
• US Dollar prints corrective pullback amid market’s preparations for the key data/events, as well as due to downbeat yields.
• Downbeat US mortgage applications, increasing bets on Fed policy pivot tame fears about German recession, Italy tax woes.
• ECB’s monthly bulletin will clarify bloc’s economic conditions, upbeat US inflation eyed to recall Fed hawks.

EUR/USD aptly portrays the pre-data anxiety as it seesaws around 1.0975-80 during the early hours of Thursday’s Asian session, struggling to extend the previous day’s corrective bounce from the weekly low. In doing so, the Euro pair justifies the mixed catalysts surrounding the US and Eurozone amid the looming fears of softer US inflation and the bloc’s recession woes, not to forget China deflation. Furthermore, the downbeat concerns about the European Central Bank (ECB) and the Federal Reserve (Fed) and prod the major currency pair, especially when the US Dollar retreats.

US Dollar Index (DXY) marked the first daily loss in three despite witnessing a corrective bounce by the end of Wednesday’s North American session to around 102.50. In doing so, the greenback’s gauge consolidates the weekly gains amid downbeat US MBA Mortgage Applications, as well as softer US Treasury bond yields.

On Wednesday, the US MBA Mortgage Applications dropped for the third consecutive week by posting -3.1% fall for the week ended on August 04, versus -3.0% prior. It’s worth noting that the solid mortgages previously fuelled the housing market and inflation, which in turn allowed the Fed to defend its hawkish bias.

Apart from the likely challenges to the Fed hawks, Biden Administration’s relief to China technology companies also helped ease the fears surrounding the Dragon Nation, joined by unimpressive China inflation data, to weigh on the US Dollar. “The US plans to target only those Chinese companies that get more than 50% of revenue from the sectors including quantum computing and artificial intelligence (AI),” said the news.

That said, an improvement in China’s Producer Price Index (PPI) for July superseded negative readings of the Consumer Price Index (CPI) for the said month. That said, CPI declines to -0.3% YoY versus -0.4% YoY expected and 0.0% prior whereas the PPI improves to -4.4% YoY compared to -4.1% YoY market forecasts and -5.4% previous readings.

Elsewhere, the CME Group FedWatch Tool shows that markets are pricing in an 86.5% chance that the Federal Reserve will pause interest rate hikes at its meeting in September. 

At home, Italy’s surprise tax on windfall profits of banks joined previously released German statistics to suggest the looming recession in the bloc’s powerhouse. Further, the global rating agencies’ downward revision to the US banks and financial institutions weighs on the risk sentiment and the EUR/USD price despite the latest corrective bounce. On the same line could be fears of the UK recession and slowing economic growth in China, not to forget the Dragon Nation’s geopolitical tension with the US and Japan about Taiwan.

Against this backdrop, Wall Street closed on the negative side despite the downbeat performance of the US Treasury bond yields.

Moving on, the ECB’s monthly Economic Bulletin will be eyed closely amid economic fears surrounding the old continent, which if confirmed can recall the Euro bears. However, the reaction might be limited as traders are more interested in the United States inflation data, per the Consumer Price Index (CPI) for July. Market forecasts suggest an improvement in the headline CPI to 3.3% YoY versus 3.0% prior while the Core CPI, namely the CPI ex Food & Energy, may remain unchanged at 4.8%.

Also read: US CPI Preview: Forecasts from 10 major banks, monthly pace should hold at 0.2%

Technical analysis

EUR/USD bulls need a clear upside break of a one-month-old descending resistance line surrounding 1.0970, as well as the 10-DMA level of around 1.0980, to keep the reins.