Euro drops to multi-week lows and approaches 1.0750, looks at ECB

• The Euro resumes its decline vs. the US Dollar.
• Stocks in Europe open Tuesday’s session in the red.
• EUR/USD challenges the 1.0750 region, or multi-week lows.
• The USD Index (DXY) advanced to three-month tops.
• US markets return to their usual activity following Monday’s holiday.
• The final Services PMIs are due in the euro area.
• The ECB will release its Consumer Expectation Survey.
• The ECB’s Schnabel, De Guindos, Fernandez-Bollo are due to speak.

The Euro (EUR) loses further ground vs. the US Dollar (USD) and drags EUR/USD to print new multi-week lows near the 1.0750 level on turnaround Tuesday. The resurgence of selling pressure around the pair appears underpinned by lower prints from the Services sector in China, as per PMI results published by Caixin earlier in the Asian trading hours.

The investors’ bias towards the safe-have universe lends support to the Greenback early in the European morning and lifts the USD Index (DXY) to new highs around 104.50 amidst the still unclear direction in US and German yields.

Meanwhile, there remains strong confidence in the market regarding the Federal Reserve's decision to halt its campaign of interest rate hikes for the remainder of the year. In addition, speculation has begun to emerge, suggesting that interest rate cuts may not materialize until March 2024.

On the other hand, the European Central Bank (ECB) finds itself navigating a climate of heightened uncertainty surrounding the potential course of interest rates beyond the summer months. Market discussions revolve around the concept of stagflation, further contributing to the prevailing sense of ambiguity.

In the domestic calendar, the release of the final Services PMI for the month of August is followed by the publication of the ECB’s Consumer Expectations Survey and speeches by Board members Eduardo Fernandez-Bollo, Isabel Schnabel, and Luis De Guindos.

Daily digest market movers: Euro suffers another bout of weak Chinese prints

• The EUR faces extra headwinds vs. the USD on Tuesday.
• Chinese Caixin Services/Composite PMIs weakened in August.
• The Services sector will take centre stage in the euro docket.
• Disinflation and cracks in the US labour market support the Fed’s impasse.
• Investors see the Fed potentially cutting rates in Q2 2024.
• The RBA left the OCR unchanged at 4.10%, as expected.

Technical Analysis: Euro risks a drop to 1.0635

EUR/USD remains well under pressure and the recent breach of the key 200-day SMA (1.0819) seems to prop up the likelihood of extra losses in the short-term horizon.  

If EUR/USD accelerates its losses, it could revisit the May low of 1.0635 (May 31) prior to the March low of 1.0516 (March 15). The loss of the latter could prompt a potential test of the 2023 low at 1.0481 (January 6) to emerge on the horizon.

On the upside, spot is now expected to target the critical 200-day SMA at 1.0819. North from here, bulls should meet the the weekly top of 1.0945 (August 30) ahead of the interim 55-day SMA at 1.0958 and prior to the psychological 1.1000 barrier and the August top at 1.1064 (August 10). Once the latter is cleared, spot could challenge the weekly peak at 1.1149 (July 27). If the pair surpasses this region, it could alleviate some of the downward pressure and potentially visit the 2023 peak of 1.1275 (July 18). Further up comes the 2022 high at 1.1495 (February 10), which is closely followed by the round level of 1.1500.

Furthermore, sustained losses are likely in EUR/USD once the 200-day SMA is breached in a convincing fashion.