Euro clings to the 1.0800 region in pre-ECB trading

• Euro gives away part of the recent 3-day advance.
• Markets in Europe will closely follow the European Central Bank event.
• Disheartening prints from the Chinese docket weigh on sentiment.
• Investors continue to digest the Fed’s hawk pause on Wednesday.
• The ECB is widely expected to hike rates by 25 bps on Thursday.
• Weekly Claims, Retail Sales, the Philly Fed Index take centre stage later.

The European currency (EUR) starts the ECB-day on the defensive vs. the US Dollar, although EUR/USD seem to hold pretty well just above the key 1.0800 the figure.

Meanwhile, the Euro, along with the rest of the risk complex, is being affected by the renewed strength of the Greenback after the Federal Open Market Committee (FOMC) meeting. The strength of the US Dollar also looks supported by the rebound in US yields across the curve.

A glimpse at Wednesday’s FOMC gathering shows that the Federal Reserve has decided to maintain its current policy settings without making any changes. However, they have indicated that they anticipate a higher peak rate in the future, implying that any pause in adjustments might be short-lived.

Other than the strength in the buck, results from the Chinese docket published during the Asian trading hours disappointed market expectations after Industrial Production and Retail Sales missed consensus in May. These results appear to eclipse the recent cut by the PboC of the 7-day reverse repo rate, which was intended to boost the so far uneven recovery in the country in the aftermath of the pandemic.

Closer to home, the European Central Bank (ECB) is forecast to raise its policy rate by a quarter-point at its gathering in the afternoon in the old continent and could signal a similar move in July. In her subsequent press conference, ECB President Christine Lagarde could strengthen this view, as the still elevated inflation in the region supports it.

Daily digest market movers: Euro looks at ECB for near-term direction

• The US Dollar recoups part of the ground lost and encourages the USD Index (DXY) to reverse two consecutive sessions with losses, including a drop to fresh multi-week lows in the 103.00 neighbourhood (June 14).
• German 10-year Bund yields extend the rebound in line with their US peers and navigate the area of monthly highs around the 2.50% zone.
• A sustained decline in the Greenback does not appear to be a done deal following the FOMC event on Wednesday and in light of the "live" meeting expected on July 26. Indeed, the Committee intends to resume raising interest rates, possibly as early as July. Furthermore, Jerome Powell indicated that a significant majority of the FOMC members are anticipating further tightening, and there were no objections. He clarified that the decision to refrain from hiking rates at the current meeting was not a "skip", while the July meeting may involve a discussion on increasing rates, and that the FOMC will evaluate each meeting independently before making any decisions.
• Anticipating a 25 bps rate hike by the European Central Bank, investors are expected to closely follow any hint regarding another potential raise at the July or September meetings.
• Final inflation figures in France are expected to confirm the persistence of disinflationary pressures, while the trade surplus in the broader euro zone is seen narrowing in April.
• Data releases across the Atlantic could see Retail Sales cooling further, a worsening of the key Philly Fed Manufacturing Index and further loss of momentum in the labour market as per weekly Initial Jobless Claims, all suggesting the existence of cracks in the so far resilient US economy.

Technical Analysis: Euro faces initial resistance near 1.0860

Euro (EUR) needs to quickly surpass the so-far June top at 1.0864 (June 14) to see gains accelerate and open the door to a rapid test of the temporary 55-day SMA at 1.0876. Once the latter is cleared, spot might target the weekly top of 1.0904 (May 16) prior to the psychological 1.1000 mark. North from here, the pair could challenge the 2023 high at 1.1095 (April 26), which is closely followed by the round level of 1.1100 and comes ahead of the weekly top of 1.1184 (March 31, 2022). In addition, the latter appears propped up by the proximity of the 200-week SMA, today at 1.1182.

In case bears regain the initiative, there are no contention levels of significance until the May low of 1.0635 (May 31). The breach of this level could sponsor a deeper decline to the March low of 1.0516 (March 15) seconded by the 2023 low at 1.0481 (January 6).