EUR/USD rallies back above 0.9700 on risk-on sentiment, weaker US dollar

• EUR/USD climbs sharply by more than 1% due to a soft US dollar.
• The energy crisis in the Euro area keeps the shared currency under pressure.
• EUR/USD Price Analysis: Stills downward biased but subject to a mean reversion move towards 0.9800.

The EUR/USD bounces from two-decade lows reached during the European session, gaining some 1.34% in the day, spurred by an improvement in market sentiment and a weaker US dollar, despite the Fed’s hawkish rhetoric, opening the door for aggressive tightening by the end of the year.

The shared currency began trading nearby the day’s lows, just below the 0.9600 figure, and dived towards a fresh two-decade low at around 0.9538 before rallying sharply towards the daily high at 0.9726 before settling around current spot prices. At the time of writing, the EUR/USD is trading at 0.9722.

The energy crisis keeps the Eurozone under pressure. On Tuesday, news that the Nord Stream pipelines 1 and 2 showed leaks sent energy prices higher. Some countries’ officials said it could be sabotage, and even Danish PM Frederiksen said it was “hard to imagine that these are coincidences.” German officials expressed concern that a “targeted attack” had caused a sudden pressure loss.

Given the backdrop, Norway was looking to increase security around its infrastructure, according to Bloomberg.

Earlier, the EU’s economic calendar featured the GfK Consumer confidence, which tumbled to -42.5 heading into October, from a -36.8 September reading, well below analysts’ estimates. According to the GfK institute, improvement in consumer morale is closely tied to lowering inflation.

In the meantime, ECB officials have expressed the need for another 75 bps rate hike at its October meeting, led by ECB member Kazimir, Rehn, and uber-hawk Austria’s central bank governor Robert Holzmann.

Aside from this, the US economic docket featured US Pending Home Sales for August, which fell by seven months in a row, decreasing by 2%, exceeding the 1.5% contraction estimated. “The direction of mortgage rates -- upward or downward -- is the prime mover for home buying, and decade-high rates have deeply cut into contract signings,” Lawrence Yun, NAR’s chief economist, said.

Meanwhile, the Fed parade continues, with Atlanta’s Fed Bostic saying that the lack of progress in inflation means that the US central bank needs to get into restrictive territory, between 4.25 and 4.50%.

EUR/USD Price Analysis: Technical outlook

Given the fundamental backdrop, the EUR/USD remains downward biased, though recent price action suggests an upward correction is likely. Cementing the case is the Relative Strength Index (RSI) exiting oversold conditions, aiming upwards, crossing above its 7-day RSI’s SMA. Therefore, a test of the 0.9800 figure is on the cards, but the overall bias favors the greenback.

EUR/USD Key Technical Levels