EUR/USD trims gains and breaks below 0.9900 post-US ISM

• EUR/USD gives away some gains and breaches 0.9900.
• The dollar rebounds following positive results from the docket.
• ISM Manufacturing surprised to the upside in October at 50.2.

EUR/USD abandons the area of daily highs around 0.9950 and makes an abrupt U-turn to revisit the sub-0.9900 zone in the wake of US data results on Tuesday.

EUR/USD: Upside capped around 0.9950

EUR/USD rapidly drops and revisits the area below 0.9900 on the back of an equally sudden rebound in the dollar, all in response to the better-than-expected prints from the US ISM Manufacturing for the month of October (50.2).

Indeed, the results do nothing but reinforce the view of a resilient US economy at a time when some Fed’s rate-setters have hinted at the potential start of a debate over the probability of slowing the pace of the subsequent rate hikes as soon as at the December meeting.

Additional releases in the US calendar saw Construction Spending unexpectedly expand 0.2% MoM in September, the final S&P Global Manufacturing PMI at 50.4 (also surpassing estimates) and the JOLTs Job Openings increase to 10.717M also in September.

What to look for around EUR

The initial optimism in the risk complex lifted EUR/USD to the 0.9950/55 band on Tuesday, just to deflate soon afterwards following auspicious results from the US calendar.

In the meantime, price action around the European currency is expected to closely follow dollar dynamics, geopolitical concerns and the Fed-ECB divergence. The resurgence of speculation around a potential Fed’s pivot seems to have removed some strength from the latter, however.

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: Germany Balance of Trade, Unemployment Change, Unemployment Rate, Final Manufacturing PMI, EMU Final Manufacturing PMI (Wednesday) – EMU Unemployment Rate (Thursday) – EMU/Germany Final Services PMI, ECB Lagarde (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.

EUR/USD levels to watch

So far, the pair is gaining 0.05% at 0.9882 and faces the next up barrier at 1.0093 (monthly high October 27) followed by 1.0197 (monthly high September 12) and finally 1.0368 (monthly high August 10). On the downside, a breach of 0.9871 (weekly low November 1) would target 0.9704 (weekly low October 21) en route to 0.9631 (monthly low October 13).