EUR/USD supported at 0.9911 but vulnerable on break belowEnergy prices, USD & risk appetite key ahead of inflation data CPI in focus as concern mounts at ECB over inflation outlookECB comments supportive but market sets high bar for Sept

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The Euro to Dollar rate reached new long-term lows last week and will face a battle to hold above a nearby level of technical support around 0.9911 on the charts in the days ahead unless the mood in global markets brightens or the burden that is the EU-U.S. interest rate differential lightens.

Europe’s single currency bucked the trend elsewhere when rebounding against the Dollar during the opening session of the new week but was unable to sustain an initial recovery above the parity level and may need a notable improvement in investor risk appetite to avoid fresh losses in the days ahead.

This is after Federal Reserve Chairman Jerome Powell spooked financial markets on Friday, leading to losses for risky assets, by warning that U.S. interest rates are likely to rise to a “restrictive level” and remain there “for some time” even in the event of a U.S. economic downturn.

“EUR/USD recovered some Powell‑induced losses and is trading near parity. The benchmark European natural gas futures plunged by about 20% yesterday after Germany said its gas storages are filling up faster than planned, offering EUR some relief,” says Carol Kong, an economist and currency strategist at Commonwealth Bank of Australia.

“Nevertheless, electricity prices in Europe remain stratospherically high and are weighing heavily on households and businesses’ finances. EU Commission President Ursula von der Leyen said the EU is looking to intervene to break the link between gas and electricity prices. Details of an EU intervention plan are yet to be announced,” Kong said in a Monday market commentary.

Above: EUR/USD shown at hourly intervals alongside GBP/USD and S&P 500 stock index futures.

Runaway natural gas prices have weighed heavily on the Euro and other regional currencies in recent months but offered relief to many by retreating from August’s record highs on Monday while the single currency may also have benefited from European Central Bank (ECB) policy developments.

“Some ECB board members also used the symposium in Jackson Hole to convince the market of their efforts in fighting inflation. Isabel Schnabel, member of the ECB’s executive board, pointed out, just as Powell had done, that there was little choice but to stick to the normalisation path to control inflation even if the euro zone were to slide into recession,” says Thu Lan Nguyen, an analyst at Commerzbank.

Chief economist Philip Lane appeared to suggest in a Monday speech that the ECB should continue lifting its interest rate in increments of 0.5% during the months ahead while other policymakers including Olly Rehn, Isabel Schnabel and Martins Kazaks all also spoke in support of further increases in European interest rates as part of the bank’s effort to bring inflation back to the ECB’s symmetric 2% target.

“The recent surge in gas prices is continuing to place upward pressure on inflation and encouraging speculation over a more hawkish ECB policy response at upcoming meetings,” says Lee Hardman, a currency analyst at MUFG, who’s a seller of the Euro.

Above: EUR/USD shown at daily intervals with spread or gap between 02-year German and U.S. government bond yields.

“We are more confident that the EUR will continue to weaken in light of the intensifying energy price crisis in Europe with the price of natural gas surging above EUR300 MWh this week. It has prompted us to lower our target and stop-loss both by 2 big figures to 0.9700 and 1.0340 respectively,” Hardman and colleagues said in a Friday research briefing.

The ECB monetary policy outlook will be back in focus early on this week with the release of German and broader European inflation figures for August on Tuesday and Wednesday, which could impact market expectations for the size of next week’s interest rate step.

However, the Euro-Dollar rate remains sensitive to changes in European gas prices and will also likely be responsive this week to U.S. economic data including Thursday’s release of the Institute for Supply Management (ISM) Manufacturing PMI and Friday’s non-farm payrolls data.

The Euro has benefited in recent weeks from U.S. data that has surprised on the downside of market expectations while delivering mixed responses to positive data and is likely to be sensitive to this week’s data possible implications for the pace at which the Fed lifts interest rates up ahead.

“The inflation figures will take full focus in Europe next week. We expect a further rise in euro area HICP inflation in August, but expect the rise to be less sharp than previous increases. Naturally for the market watching energy prices soar higher the question is how quickly will this feed through to CPI inflation,” says Jordan Rochester, a G10 FX strategist at Nomura.

Above: EUR/USD shown at monthly intervals with Fibonacci retracements of 2002 uptrend indicating possible areas of technical support.