EUR/USD retreats from parity ahead of ECB, Fed Chairman Powell's speech

• EUR/USD fades rebound from nearly two-decade low, sidelined of late.
• Cautious mood ahead of the key events join firmer yields, hawkish Fed bets to weigh on prices.
• Optimistic US data, Beige Book joined pre-ECB consolidation to favor buyers previously.
• ECB’s ability please hawks, Powell’s defense of aggressive rate hikes will be critical to watch for clear directions.

EUR/USD slips to 0.9990, after bouncing off a 19-year low the previous day, as the US dollar regains upside momentum amid a cautious mood ahead of the key events. Also exerting downside pressure on the major currency pair could be the economic hardships for the bloc, as well as indecision over the size of the European Central Bank’s (ECB) rate hike.

The latest pullback rebound in yields and hawkish Fed bets could have weighed on the EUR/USD prices, as well as downbeat comments from European Commission President Ursula von der Leyen.

US 10-year Treasury yields reverse the previous day’s losses by around 3.27%, after taking a U-turn from the highest levels since mid-June. It should be noted that the CME’s FedWatch Tool signals a 77% chance of the Fed’s 75 basis points (bps) rate hike in September, versus 73% marked the previous day.

On the other hand, EU President von Der Leyen sounds pessimistic as she said the previous day that 50% of the EU's aluminum and zinc capacity has already been forced offline due to the power crisis.

On Wednesday, the pair marked the biggest daily jump in 2.5 months as firmer data from the Eurozone joined optimistic statements of the Fed’s Beige Book. Also favoring the buyers were mixed comments from the Fed policymakers.

That said, The Eurozone’s final reading of the Gross Domestic Product (GDP) rose by 0.8% QoQ in the three months to June of 2022 (Q2 2022) vs. 0.6% initial forecasts. That said, the YoY figures also improved to 4.1% in Q2 vs. 3.9% marked in the initial forecasts. On the other hand, US Goods and Services Trade Balance improved to $-70.7B in July from $-80.9B prior, versus $-70.3B forecasts. Further, the Good Trade Balance deteriorated to $-91.1B from $-89.1B marked in July. Additionally, the Fed’s Beige Book signaled a recovery in the supply chain and slowing price growth, which in turn triggered the risk-on mood and favored the pair buyers.

It should be noted that Fed Vice Chair Lael Brainard reiterated on Wednesday that the Fed's policy rate will need to rise further and that they will need to keep the policy restrictive 'for some time,' as reported by Reuters. On the other hand, Cleveland Federal Reserve Bank President Loretta Mester said, "I will decide my preferred size of rate hike at the September meeting itself."

Amid these plays, Wall Street closed positive and the yields retreated whereas the S&P 500 Futures print mild losses by the press time.

Looking forward, the art of Fed Chair Powell’s defense of the aggressive rate hikes will be at test during today’s speech, especially due to the hawkish hopes from the ECB. Hence, the EUR/USD pair’s further downside hinges on how well Powell manages to convince markets of further rate hikes. Ahead of that, the ECB’s ability to please the policy hawks will be important to watch as there prevails indecision between 50 bps and 75 bps move.

Also read: ECB Preview: Between Putin's rock and hard inflationary place, the deck is stacked against the euro

Technical analysis

The 20-DMA hurdle, around 1.0025 by the press time, challenges the EUR/USD pair’s rebound from a downward sloping support line from mid-July, near 0.9880 at the latest. That said, RSI and MACD hint at corrective pullback.