EUR/USD regains the smile and looks to retake the parity zone

• EUR/USD manages to bounce off weekly lows near 0.9900.
• The greenback appears offered following Thursday cycle tops.
• Market participants will closely follow the release of August NFP.

The single currency regains some composure and prompts EUR/USD to trim part of the strong drop to the vicinity of 0.9900 recorded in the previous session.

EUR/USD now focuses on Payrolls

Following Thursday’s deep pullback, EUR/USD now trades with decent gains and re-targets the key parity level in a context where investors seem to be cashing up part of the recent advance in the greenback to new cycle peaks near the 110.00 hurdle when gauged by the US Dollar Index (DXY).

In the meantime, speculation around a 75 bps rate hike by the ECB at the September meeting remains on the rise and it has been exacerbated after signs that inflation in the region is not giving up, as per the latest flash CPI figures for the month of August.

In the domestic calendar, Germany’s trade surplus shrank a tad to €5.4B in July and Producer Prices in the broader Euroland rose 4.0% MoM in July and 37.9% over the last twelve months.

Across the pond, the US labour market report will take centre stage seconded by Factory Orders.

What to look for around EUR

EUR/USD picks up renewed pace with the immediate target at the psychological parity zone in the wake of Thursday’s sharp sell-off.

So far, price action around the European currency is expected to closely follow dollar dynamics, geopolitical concerns, fragmentation worries and the Fed-ECB divergence. However, potential shifts to a more hawkish stance from ECB’s policy makers regarding the bank’s rate path could be a source of strength for the euro.

On the negatives for the single currency emerge the so far 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.

Key events in the euro area this week: Germany Balance of Trade, EMU Producer Prices (Friday).

Eminent issues on the back boiler: Continuation of the ECB hiking cycle. Italian elections in late September. Fragmentation risks amidst the ECB’s normalization of its monetary conditions. Impact of the war in Ukraine and the persistent energy crunch on the region’s growth prospects and inflation outlook.

EUR/USD levels to watch

So far, the pair is gaining 0.40% at 0.9948 and further upside could retest 1.0090 (weekly high August 26) ahead of 1.0202 (high August 17) and finally 1.0203 (55-day SMA). On the flip side, the breach of 0.9899 (2022 low August 23) would target 0.9859 (December 2002 low) en route to 0.9685 (October 2022 low).