EUR/USD stays defensive below 1.0200 as hawkish Fed bets propel DXY ahead of US inflation

• EUR/USD consolidates the first weekly loss in three, retreats from intraday high of late.
• Moody’s cut Italy’s credit rating amid political jitters, US NFP propelled hawkish Fed bets.
• US-China tension over Taiwan also underpins the US dollar’s safe-haven demand.
• Intraday traders should focus on risk catalysts amid a light calendar.

EUR/USD treads water after the recently downbeat performance as bears struggle to justify their strength amid a sluggish start to the key week. That said, the major currency pair seesaw around 1.0180-85 during early Monday morning in Europe.

The quote’s latest inaction could be linked to the absence of major data, as well as anxiety ahead of the key US Consumer Price Index (CPI) for July.  However, hawkish bias over the US Federal Reserve’s (Fed) next move and pessimism surrounding the Eurozone keep the EUR/USD bears hopeful.

The US employment report for July and the Sino-American tension over Taiwan gain major attention when it comes to the strongly bullish catalyst for the US dollar. The headline Nonfarm Payrolls (NFP) rose to 528K versus 250K expected and 398K upwardly revised prior. Further, the Unemployment Rate also inched lower to 3.5% compared to 3.6% expected and previous readings.  Following the data, San Francisco Fed President Mary Daly said during the weekend that the Fed is far from done in combating inflation. The policymaker also added, “50 bps increase is definitely in play. We need to keep an open mind.”

On the other hand, Reuters came out with the news suggesting that China is up for ‘regular’ military drills east of the Taiwan Strait median line. That said, the dragon nation’s Foreign Ministry announced on Friday that they will sanction US House of Representative Speaker Nancy Pelosi over the Taiwan visit. On the other hand, Taiwan's Defense Ministry reported 66 Chinese aircraft conducting activities in the Taiwan Strait as of 5 pm local time on Sunday. Further, US Secretary of State Anthony Blinken mentioned that China's provocative actions were a significant escalation.

It should be noted that political jitters in Italy and Moody’s announcement of cutting Italy’s outlook from “Stable” to “Negative”, while keeping the sovereign rating at Baa3, also exert downside pressure on the EUR/USD prices.

Amid these plays, the US 10-year Treasury yields ease back to near 2.82% after rallying 14 basis points (bps) to 2.83% the previous day. Further, S&P 500 Futures print mild losses and the Asia-Pacific shares also remain pressured.

Looking forward, a light calendar for the may restrict short-term EUR/USD moves ahead of the key US inflation data, up for publishing on Wednesday. Also important will be how the Italian politicians will be able to manage the national politics ahead of the September elections.

Technical analysis

Although the 20-DMA restricts short-term EUR/USD downside near 1.1665, the RSI (14) and the MACD signals suggest that the buyers are running out of steam.