EUR/USD makes a U-turn and drops to new lows near 0.9870

• EUR/USD reversed the initial uptick to the vicinity of 0.9990.
• The dollar pushes higher and records new cycle highs.
• US ISM Non-Manufacturing next of relevance in the docket.

After briefly testing the 0.9990 region, EUR/USD sparked a corrective downside and returned to the sub-0.9900 region on Tuesday.

EUR/USD could now revisit the 2022 low

EUR/USD now adds to Monday’s negative start of the week and revisits the area below the 0.9900 yardstick on the back of the abrupt change of direction in the greenback, which lifts the US Dollar Index (DXY) to new highs near 110.30, an area last traded back in December 2002.

The daily downtick in the pair comes hand in hand with the march higher in US and German yields, as US investors return to their desks following Monday’s inactivity due to the Labor Day holiday.

Earlier in the euro docket, Germany’s Construction PMI eased to 42.6 in August (from 43.7). In the US calendar, the ISM Non-Manufacturing surprised to the upside at 56.9 in August.

What to look for around EUR

EUR/USD failed to ignite a lasting bullish attempt and succumbed once again to the unabated rally in the dollar.

So far, price action around the European currency is expected to closely follow dollar dynamics, geopolitical concerns, fragmentation worries and the Fed-ECB divergence. The latter, in the meantime, keeps closely following the prevailing debate around the size of the next interest rate hikes by both the ECB and the Federal Reserve.

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 Construction PMI (Tuesday) – Flash EMU Q2 GDP Growth Rate (Wednesday) – ECB Interest Rate Decision, Fed Powell (Thursday) – Eurogroup Meeting, Emergency Energy Meeting (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 losing 0.52% at 0.9876 and a breach of 0.9874 (2022 low September 5) would target 0.9859 (December 2002 low) en route to 0.9685 (October 2002 low). On the other hand, the next up barrier emerges at 1.0090 (weekly high August 26) ahead of 1.0182 (55-day SMA) and then 1.0202 (August 17 high).