EUR/USD pares US inflation-led losses below 1.0000, EU’s energy moves, trade talks eyed

• EUR/USD remains sidelined around weekly low after falling the most in two years.
• US inflation renewed hawkish Fed concerns ahead of next week’s FOMC.
• Slump in stocks, yield curve inversion also underpinned the greenback’s safe-haven demand.
• EU’s von der Leyen to announce energy price cap plans, USTR Tai visits EC VP Dombrovskis.

EUR/USD licks US inflation-led wounds around the weekly bottom, picking up bids to 0.9980 during Wednesday’s Asian session. In doing so, the major currency pair consolidates the biggest daily fall in two years ahead of the European Union’s (EU) diplomatic moves.

US inflation data renewed fears of the Federal Reserve’s aggressive rate hike, as well as propelled the recession woes, on Tuesday. Also acting as the downside catalysts for the EUR/USD are the geopolitical concerns surrounding China and Russia. That said, US Consumer Price Index (CPI) for August rose past 8.1% market forecasts to 8.3% YoY, versus 8.8% prior regains. The monthly figures, however, increased to 0.1%, more than -0.1% expected and 0.0% previous readings. The core CPI, means CPI ex Food & Energy, also crossed 6.1% consensus and 5.9% prior to print 6.3% for the said month.

On the other hand, Eurozone ZEW Economic Sentiment dropped to -60.7 for September, versus -52 expected and -54.9 prior. For Germany, the sentiment gauge slide to -61.9 compared to -60.0 market forecasts and -55.3 previous readings. “We face a threat of recession next year,” German Economy Minister Robert Habeck said following the data on Tuesday. On the same line, the Economy Ministry update stated that German economic outlook for H2 dramatically worsened, output in H2 could stagnate or contract.

It should be noted that the hawkish Fed bets increased, with the 75 basis points (bps) of a hike appearing almost certainly next week. It’s worth noting that there is around 25% chance that the US Federal Reserve (Fed) will announce a full 1.0% increase in the benchmark Fed rate on September 21 meeting.

The inversion between the short-term and the long-term US Treasury bond yields also widened after US inflation data and propelled the recession woes, which in turn drowned the EUR/USD prices due to the pair’s risk-barometer status. That said, the US 10-year Treasury yields rallied to 3.412% and those for 2-year bonds increased to 3.76% following the data, around 3.41% and 3.745% respectively at the latest. Furthermore, the US stocks had their biggest daily slump in almost two years after the US CPI release and that also pleased the metal bears.

Furthermore, US President Joe Biden’s chip plans to increase hardships for China, as well as the rush toward stronger ties with China to fuel the Sino-American woes. Additionally, expectations that Russia will hit hard after retreating from some parts of Ukraine also weighed on the market sentiment and the EUR/USD prices.

Recently, US President Joe Biden mentioned, “I'm not concerned about the inflation report released today.” The US leader also added that the stock market does not always accurately represent the state of the economy. The reason could be linked to the biggest slump in the US equities in two years after the US inflation data release.

Moving on, European Union (EU) Chief Ursula von der Leyen’s plans for the energy price capping and US Trade Representative Katherine Tai’s EU visit to meet European Commission Vice President Valdis Dombrovskis will be important to watch for nearby moves. Also crucial will be the US Producer Price Index (PPI) before Thursday’s August month US Retail Sales and Friday’s preliminary reading of the Michigan Consumer Sentiment Index for September.

Technical analysis

A clear downside break of the weekly bullish channel directs EUR/USD bears towards the yearly bottom surrounding 0.9860.