Photo by Ibrahim Boran on Unsplash
 

• EUR/USD resumes the decline and retests at 1.0670/60.
• The greenback appears well bid and weighs on the risk complex.
• Germany's Unemployment Rate held steady at 5.6% in May.

Sellers remain well in control of the sentiment around the European currency and now force EUR/USD to drop to 2-month lows near 1.0660 on Wednesday.
 

EUR/USD weaker on USD-buying, risk-off

EUR/USD extends the sell-off to multi-week lows in the proximity of the 1.0660 region amidst the stronger dollar and in response to disheartening prints from the Chinese calendar earlier on Wednesday.

Indeed, poor prints from the Chinese manufacturing and services sectors reinforce the idea of an uneven recovery in that economy and pour cold water over investors’ expectations of a rapid rebound.

Also failing to lend some support to the single currency appear in comments from ECB Board member M. Müller, who advocated for at least two more (25 bps) rate hikes. In addition, he deemed "probably too optimistic" the idea of rate cuts early in 2024. His colleague L. de Guindos also argued that markets are absorbing QT in a positive and smooth way.

In the domestic docket, France’s flash Inflation Rate is expected to have contracted 0.1% MoM in May and risen 5.1% YoY. In Germany, the Unemployment Change increased by 9K people in May, and the Unemployment Rate remained unchanged at 5.6%. Later in the session, advanced German inflation figures will also take centre stage, along with the participation of President C. Lagarde in a Q&A session with students.

In the US, MBA Mortgage Applications are due along with the Fed’s Beige Book and speeches by FOMC members Harker, Jefferson, and Bowman.
 

What to look for around EUR

The sell-off in EUR/USD appears unabated and revisits the 1.0660 region, or 2-month lows, on Wednesday.

In the meantime, the pair’s price action is expected to closely mirror the behaviour of the US Dollar and will likely be impacted by any differences in approach between the Fed and the ECB with regard to their plans for adjusting interest rates.

Moving forward, hawkish ECB speak continues to favour further rate hikes, although this view appears to be in contrast to some loss of momentum in economic fundamentals in the region.

Key events in the euro area this week: Germany Unemployment Change, Unemployment Rate, Flash Inflation Rate, ECB Lagarde (Wednesday) – Germany Retail Sales/Final Manufacturing PMI, EMU Final Manufacturing PMI, Flash Inflation Rate, ECB Lagarde, ECB Accounts (Thursday).

Eminent issues on the back boiler: Continuation of the ECB hiking cycle in June and July (and September?). Impact of the Russia-Ukraine war on the growth prospects and inflation outlook in the region. Risks of inflation becoming entrenched.
 

EUR/USD levels to watch

So far, the pair is losing 0.66% at 1.0663 and faces initial contention at 1.0600 (round level) seconded by 1.0516 (low March 15) and finally 1.0481 (2023 low January 6). On the upside, a break above 1.0813 (100-day SMA) would target 1.0881 (55-day SMA) en route to 1.1000 (round level).

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