EUR/USD bears step in as the US dollar resurges from the dead

• EUR/USD pressured by the revival in the greenback.
• Risks in the UK and from the Fed continue to weigh on market sentiment. 

EUR/USD is entering Tokyo offered on a stronger US dollar that has been coming up for air in the second half of the week so far. Risk sentiment has been doused by ongoing disruptions in UK politics and US monetary policy skewed heavily to the hawkish side. At the time of writing, the euro is trading at 0.9765 vs the greenback which has rallied from a two-week low.

The benchmark 10-year Treasury yields rose to 14-year highs, and the greenback has hit another 32-year peak against the yen, approaching the 150 level at which some traders think the Bank of Japan and Ministry of Finance might intervene. All in all, the markets are squeamish which is sending a bid into the safe haven US dollar as traders look ahead to the Federal Reserve blackout week before when the central bank is expected to lift rates by another 75 basis points when it meets on November 1-2. Moreover, an additional 50 or 75 basis point increase is also likely for December. 

''Risk sentiment deteriorated overnight. Market relief at the UK unwinding most of their mini-budget gave way to angst as the focus returned to the global inflation backdrop, and the aggressive rate hikes that will be needed to tame an increasingly persistent inflation pulse,'' analysts at ANZ Bank said. In this regard, the outlook for the UK economy remains touch and go which could be taking some of the limelight from the eurozone that has otherwise been taking the brunt of the spotlight and negative feedback loop in markets for the best part of 2022. The euro managed to climb to a high of near 0.9280 towards the end of September and is still holding in bullish territories while above 0.8600. ''How the Eurozone copes this winter will be a strong determinant of whether the EUR can pull back some ground vs. GBP in the months ahead,'' the analysts at Rabobank said.

''We have been bearish of GBP for many months, and while a lot of bad news is now on the price, there is still too much uncertainty in both the UK economic and political outlooks for us to turn constructive on the outlook for GBP. Our 3-month forecast of 1.06 appears a little further away than it did a few days ago. Even so, we have not yet seen enough good news to revise this higher.''

Domestically, the European Union published the second estimate of the September Consumer Price Index, which was downwardly revised to 9.9% YoY, barely below the 10% previously estimated. Core inflation was confirmed at 4.8%.

Meanwhile, the euro net long positions dropped back having reached their strongest levels since early June the previous week. ''While ECB comments have enhanced the risks of further rates hikes in the coming months, concerns are mounting about the impact on the economy (and in particular the pressure on Germany’s industrial sector) from high energy costs,'' the analysts at Rabobank noted.