EURUSD dribbles above 1.0040 support as sentiment sours, focus on US mid-term elections, inflation

• EURUSD retreats from two-month high, snaps three-day uptrend with mild losses.
• Covid woes, election jitters probe the previous risk-on mood.
• Hawkish ECBSpeak, downbeat US data keeps buyers hopeful.
• Fedspeak, political and covid updates will be crucial for intraday directions as bears seek entry.

EURUSD remains sidelined around 1.0060 while pausing a three-day winning streak near a two-month during early Wednesday. The major currency pair cheered broad US dollar weakness to refresh the multi-day high before the latest challenges to the optimism probed the bulls.

Fresh covid woes from China and early polls of the US mid-term elections probe the market’s risk appetite of late. That said, China reports the highest levels of new COVID cases in six months, with the latest addition of 8,335 for November 08, while marking a fresh virus-led lockdown in Guangzhou’s second district.

On the other hand, the latest polls cited by Reuters suggest that Republicans are favored to win control of the House of Representatives and possibly the Senate, which in turn raises concerns over increasing the US debt ceiling next year. The Republicans are also likely to temper potential Democratic spending and regulations.

Amid these plays, Wall Street closed positive for the third consecutive day while the US 10-year Treasury yields snapped a four-day uptrend. Further, the S&P 500 Futures print mild gains but the market’s optimism seems to fade of late.

It’s worth noting that the hawkish comments from European Central Bank (ECB) officials and downbeat US data joined the risk-on mood to favor EURUSD bulls the previous day.

“We will continue raising rates to a level that ensures inflation will come back into line with the ECB's definition of price stability,” said ECB Vice President Luis de Guindos on Tuesday as reported by Reuters. Further, ECB policymaker and Germany’s central bank head Joachim Nagel mentioned, “Large rate hikes are necessary.” Elsewhere, Eurozone Retail Sales improved to -0.6% YoY in September versus -1.3% expected and upwardly revised -1.4% prior. Alternatively, the US NFIB Small Business Optimism Index for October, 91.3 versus 92.1 prior.

Moving on, comments from various Federal Reserve (Fed) officials may entertain EURUSD traders but major attention will be given to the risk catalysts mentioned above.

Also read: US Inflation Preview: Markets set to seize on falling Core CPI to revive pivot play, three scenarios

Technical analysis

A daily closing beyond the convergence of the 100-DMA and a downward-sloping trend line from early August, around 1.0050-40, becomes necessary for the EURUSD bears to retake control. Even so, the 1.0000 parity level and a joint of the 50-DMA and 21-DMA, close to 0.9880, could challenge the pair’s further downside.

Meanwhile, the resistance line of a six-week-old bullish channel, around 1.0150 by the press time, could restrict short-term advances of the pair.