EUR/USD: Inflation fears defend bears above 1.1600, Eurozone, US PMIs eyed

• EUR/USD reverses pullback from weekly top, sidelined of late.
• Market sentiment dwindles even as ECB, Fed policymakers cite inflation fears.
• US stimulus, China’s Evergrande and Sino-American trade deal news probe risk-off mood.
• Preliminary readings of October’s Markit PMIs will be the key amid escalating reflation woes.

EUR/USD struggles to extend early Asian recovery moves around 1.1630 heading into Friday’s European session.

The major currency pair snapped a six-day uptrend the previous day on concerns that escalating price pressures in the US and Eurozone may push the respective central banks towards faster monetary policy normalization. However, sentiment-positive headlines challenged the sellers afterward.

While Fed Governor Christopher Waller followed Federal Reserve Governor Randal Quarles and Cleveland Fed President Loretta Mester to highlight the inflation fears, New York Federal Reserve (Fed) President John Williams is the latest one to reiterate the phenomena. The same could be observed in the US inflation expectations, per the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, as the gauge jumps to a nine-year high.

On the other hand, European Central Bank (ECB) Governing Council member Ignazio Visco said on Thursday that supply bottlenecks are starting to weigh on the Italian economy and added that they could last for longer than expected, per Reuters.

It should be noted that the inflation chatters help the US Treasury yields to poke the key 1.70% level, a break of which triggered the US dollar rally in the past.

Following that, news concerning US President Joe Biden’s optimism over striking a deal to pass major infrastructure and social spending measures and chatters surrounding the Sino-American phase one trade deal tamed the pessimists. Additionally, Evergrande’s ability to pay a bond coupon and hopes of getting assets sold, despite prior rejection from Hopson, challenge the risk aversion wave.

While portraying the mood, stock futures recover and the US Dollar Index (DXY) fades the previous day’s rebound from a three-week top. Though, the US 10-year Treasury yields remain firmer around 1.69% and keep EUR/USD buyers hopeful ahead of the key PMI data for October.

October’s preliminary activity data for Germany and Eurozone will be the key after Italy flagged risk of heating inflation. Following that, the US Markit PMIs will be crucial to follow for fresh impulse. Given the firmer US Treasury yields, strong US data may recall the EUR/USD bears. Also important will be speeches from Fed Chairman Jerome Powell and San Francisco Fed President Mary C. Daly.

Technical analysis

EUR/USD formed a double top bearish chart pattern around 1.1665-70, also comprising 61.8% Fibonacci retracement (Fibo.) of September 22 to October 12 downturn. Descending RSI line and sustained trading below 200-SMA (on the four-hour chart) also favor the pair sellers. However, the support line of a two-week-old ascending trend channel joins 38.2% Fibonacci retracement of the stated short-term moves, also 23.6% Fibo. level of a decline from early September, restrict the quote’s immediate downside around 1.1620-15.