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- A combination of factors dragged EUR/USD lower for the second straight day on Friday.
- A positive risk tone capped the safe-haven USD and extended some support to the pair.
- The Russia-Ukraine crisis should continue as a headwind for the shared currency.
The EUR/USD pair added to the previous day's heavy losses and edged lower for the second successive day on Friday amid fading hopes of diplomacy in Ukraine. Investors remain worried that the European economy, which relies heavily on Russia to meet its energy needs, will suffer the most from the spillover effect of the Ukraine crisis. This, in turn, acted as a headwind for the shared currency, which, along with modest US dollar strength, exerted some downward pressure on the major.
Bulls seemed rather unimpressed by hotter-than-anticipated Eurozone consumer inflation figures. According to the flash estimate, the Harmonised Index of Consumer Prices (HICP) accelerated sharply to 7.5% YoY in March. This was well above consensus estimates, pointing to a rise to 6.6% from the previous month's upwardly revised reading of 5.9%. However, the Core HICP missed market expectations and rose 3% during the reported month from 2.7% in February.
From the US, the monthly jobs data showed that the economy added 431K jobs in March as against the 490K expected. To a more significant extent, the disappointment was offset by an upward revision of the previous month's reading to 750K from the 678K reported earlier. The unemployment rate fell to 3.6% from 3.8% earlier, while Average Hourly Earnings rose 0.4% MoM compared to the 0.1% increase in February. The data reaffirmed bets for a more aggressive tightening by the Fed.
The markets seem convinced that the Fed would hike interest rates by 100 bps over the next two meetings to combat high inflation. This, in turn, pushed the yield on the two-year US government bond to a three-year peak and further underpinned the buck. That said, a positive risk tone capped the safe-haven greenback. Apart from this, speculations that the ECB will scale back its ultra-loose policy as soon as year-end to tame surging inflation extended some support to the pair.
However, any meaningful upside still seems elusive amid talk of bans on Russian gas. The EU gets about 40% of its gas and 30% of its oil from Russia and has no easy substitutes if supplies are disrupted. This, in turn, should hold back traders from placing any aggressive bullish bets around the common currency. Hence, the market focus will remain glued to new developments surrounding the Russia-Ukraine saga, which should provide some impetus and the USD price dynamics.
Technical outlook
From a technical perspective, acceptance below the 38.2% Fibonacci level of the recent sharp pullback from the vicinity of the 1.1500 psychological mark favours bearish traders. Hence, a subsequent slide below the 1.1030-1.1025 intermediate support remains a distinct possibility en-route the key 1.1000 psychological mark. The following relevant support is pegged near the 23.6% Fibo. level, around the 1.0970 area, which will reaffirm the near-term negative bias if broken decisively. The pair would turn vulnerable to accelerate the fall towards the 1.0900 mark before eventually sliding to the 1.0860 support en-route the YTD low, around the 1.0800 mark touched on March 7.
On the flip side, any meaningful move back above the 38.2% Fibo. level, around the 1.1065-1.1070 region, now seems to confront stiff resistance near the 1.1100 mark. Sustained strength could allow bulls to aim back to test the 50% Fibo. level, around mid-1.1100s. This is followed by last week's swing high, around the 1.1185 region, and the 1.1200 mark, which, if cleared decisively, should pave the way for a move towards the 61.8% Fibo. level, around the 1.1230-1.1235 zone. The upward trajectory could then push spot prices towards the 1.1300 round figure.
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