Euro sinks to three-week lows near 1.0940 ahead of key inflation data

• Euro extends its decline well south of 1.1000 against the US Dollar.
• Stocks in Europe open Friday’s session mostly on the defensive.
• EUR/USD weakens to three-week lows near 1.0940.
• Flash Q2 GDP Growth Rate in Germany came in short of estimates.
• Investors’ attention remains on US PCE, advanced Germany’s CPI.

The Euro (EUR) continues to face significant pressure and loses ground against the US Dollar (USD) as the week comes to a close, resulting in EUR/USD weakening to levels not seen in three weeks, near 1.0940.

The rapid decline in the pair gained momentum after the European Central Bank (ECB) decided to raise its policy rates by 25 bps on Thursday. This decision came together with a dovish message, as the bank indicated the possibility of a pause in its rate-hiking cycle as early as the September meeting. The ECB also painted a less-optimistic picture regarding the economic outlook for the region.

Regarding the potential rate pause, President Christine Lagarde appears to have reinforced this view by suggesting an "open-minded" approach to the September meeting. She also emphasized that future rate decisions will depend on economic data.

As investors continue to sell off the Euro, the US Dollar Index (DXY) is gaining traction and may potentially test the 102.00 region. This is supported by continued buying interest in the Greenback towards the end of the week, along with higher yields in the US bond market, particularly in the belly and the long end of the curve.

On the domestic front, preliminary GDP figures in Germany indicate a 0.2% YoY contraction in the economy for the April-June period. Later in the session, advanced inflation figures are expected to be released for Germany, as well as the final Consumer Confidence data for the broader euro area.

In the US, all eyes are on the release of inflation figures, measured by the PCE and Core PCE. Additionally, other crucial data to be released includes Personal Income, Personal Spending, Employment Costs Index, and the final Michigan Consumer Sentiment gauge.

Daily digest market movers: Euro regains downside pressure after ECB

• The EUR accelerates losses after breaching 1.1000 against the USD.
• The USD Index faces extra buying pressure and flirts with 102.00.
• German preliminary Q2 GDP figures disappoint.
• US, German 10-year yields advance modestly.
• Investors’ focus will be on German CPI, US PCE.
• The BoJ surprises everybody after tweaking its yield-curve-control stance.
• ECB’s Simkus, Vasle suggested a pause in September is an option.
• ECB’s SPF sees inflation barely changed in the next three years.

Technical Analysis: Euro could potentially drop to the 1.0900 region

EUR/USD breaks below the 1.1000 key support with apparent determination, suggesting that a potential deeper pullback is in store in the short-term horizon.

If bears push harder, EUR/USD should meet immediate contention at the temporary 55-day and 100-day SMAs at 1.0905 and 1.0902, respectively. The loss of this region could open the door to a potential visit to the July 6 low of 1.0833 ahead of the key 200-day SMA at 1.0717 and the May 31 low of 1.0635. South from here emerges the March 15 low of 1.0516 before the 2023 low of 1.0481 on January 6.

On the other hand, occasional bullish attempts could motivate the pair to challenge the 2023 high at 1.1275 recorded on July 18. Once this level is cleared, there are no resistance levels of significance until the 2022 peak of 1.1495 on February 10, which is closely followed by the round level of 1.1500.

The constructive view of EUR/USD appears unchanged as long as the pair trades above the key 200-day SMA.