Euro bounces off 1.0700 ahead of key US services sector data

• The Euro attempts a tepid rebound against the US Dollar.
• Stocks in Europe opened with broad-based losses.
• EUR/USD appears to have met some contention near 1.0700.
• The USD Index (DXY) shed some ground after recent peaks.
• The US ISM Services PMI will be in the limelight on Wednesday.
• Germany’s Factory Orders plunged 11.7% on month in July.

The Euro (EUR) regains some balance against the US Dollar (USD) on Wednesday, helping EUR/USD to leave behind Tuesday’s multi-week lows in the 1.0700 neighbourhood.

After advancing to fresh six-month tops just below the 105.00 figure in the previous session, the Greenback faces some selling pressure and recedes to the 104.80-104.70 band when tracked by the USD Index (DXY). The small downtick in the index came despite the marked bounce in US yields across different timeframes.

In the meantime, steadfast confidence pervades the market with regards to the Federal Reserve's (Fed) resolution to cease its campaign of raising interest rates for the remainder of the year. At the same time, investors seem to be assuming that any interest rate reductions may not come until March 2024.

Conversely, the European Central Bank (ECB) finds itself traversing a landscape fraught with heightened uncertainty regarding the future trajectory of interest rates beyond the summer season. Market deliberations revolve around the notion of stagflation, amplifying the prevailing air of ambiguity. 

In the euro docket, the Construction PMI in Germany improved marginally to 41.5 in August, and Factory Orders contracted markedly by 11.7% in July on month. Later in the session, Retail Sales in the broader euro area are also due.

In the US, the usual weekly Mortgage Applications tracked by MBA are followed by the IBD/TIPP Economic Optimism index, the Balance of Trade, the final S&P Global Services PMI for August, and the always-relevant ISM Services PMI.

Daily digest market movers: Euro meets initial contention near 1.0700

• The EUR attempts a mild recovery against the USD midweek.
• US yields resume the marked march north.
• ECB’s Klaas Knot does not rule out another interest-rate raise.
• Disinflation and cracks in the US labour market support the Fed’s pause.
• Markets continue to price in Fed rate cuts in Q2 2024.

Technical Analysis: Euro risks deeper retracements 

EUR/USD has met some initial respite to the ongoing intense retracement around the 1.0700 region. However, the recent breakdown of the critical 200-day Simple Moving Average (SMA) at 1.0820 continues to favour extra losses in the short term.

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

On the upside, spot is expected to target the critical 200-day SMA at 1.0820. North from here, bulls should meet the the weekly top of 1.0945 from August 30 ahead of the interim 55-day SMA at 1.0953 and prior to the psychological 1.1000 barrier and the August 10 top at 1.1064. Once the latter is cleared, spot could challenge July 27 peak at 1.1149. If the pair surpasses this region, it could alleviate some of the downward pressure and potentially visit the 2023 peak of 1.1275 seen on July 18.

A sustained decline is likely in EUR/USD while it remains below the 200-day SMA.