EUR/USD extends recovery above 1.0550, downside seems likely as US NFP hogs limelight

• EUR/USD has scaled above 1.0550 after a recovery move, however, the recovery move lacks fundamental strength.
• Federal Reserve has confirmed a higher terminal rate than previously anticipated.
• European Central Bank might continue its 50 bps rate hike spell despite contracting German Retail Sales.
• EUR/USD is expected to deliver a sheer downside amid the formation of an Inverted Flag pattern.

EUR/USD has stretched its recovery above the immediate resistance of 1.0550 in the early European session. The major currency pair attempted recovery from 1.0540 as the US Dollar Index (DXY) surrendered the critical support of 105.20. For building an upside bias, the shared currency pair has to fulfill plenty of filters.

The USD Index has shifted into a volatility contraction phase after Federal Reserve (Fed) chair Jerome Powell’s hawkish remarks-led perpendicular upside. The mighty USD Index is expected to remain sideways further till the release of the United States Nonfarm Payrolls (NFP) data. S&P500 futures have trimmed minor losses, however, the downside bias is still favored as US recession fears are escalating on expectations that Federal Reserve Powell will announce a bigger rate hike in March to press down the recovery move from the Consumer Price Index (CPI).

A consideration of a higher terminal rate than previously anticipated from Federal Reserve Powell has already pushed two-year US Treasury yields to the highest level recorded in 2007. According to DoubleLine Capital LP Chief Investment Officer Jeffrey Gundlach, the bond market is doubling down on the prospect of a US recession after Federal Reserve Chair Jerome Powell warned of a return to large interest rate hikes, prompting the yield on two-year notes to rise to as much as 5.08%. The analyst believes that the Two-year US Treasury yields have not peaked yet, Bloomberg reported.

A further increase in two-year US Treasury yields could dampen interest in growth and technology stocks as investors would be required to discount them with higher rates, which will trim their future cash flows.

US Nonfarm Payrolls hogs limelight

There is no denying the fact that Federal Reserve Powell has already warned the street that the central bank is prepared to raise rates further to bring down persistent inflation. However, the release of the US Nonfarm Payrolls (NFP) data on Friday will provide more cues.

According to the estimates, the official US Employment data is expected to show a decline in the number of payrolls added in February to 203K from the former release of 514k. A figure of 203K is not so bad but looks worthless in front of January’s 514K figure. Investors should be aware that a figure of 514K was an exceptional one in the past seven months.

Apart from that, the Unemployment Rate is expected to remain steady at multi-decade low figures. Also, the Average Hourly Earnings are expected to increase to 4.8% on an annual basis as the shortage of labor would be offset by higher pay-off. Higher funds in the pocket of households might bring more resilience to consumer spending.

Weak German Retail Sales look insufficient to press down hawkish ECB bets

The spree of contracting German Retail Sales continued on Wednesday as households are facing higher price pressures. Individuals are struggling to offset the impact of inflation-adjusted prices of goods and services as the increment in the labor cost index is lower than the pace of the rising Consumer Price Index (CPI). Annual German Retail Sales (Jan) contracted consecutively for the ninth time. The economic data contracted by 6.9% while the street was expecting a contraction of 6.1%. Also, monthly Retail Sales data contracted by 0.3% against an expansion of 2.0% as expected.

Despite contracting German Retail Sales, the European Central Bank (ECB) could not consider a slowdown in the policy-tightening pace as the current inflation is four times the desired level. European Central Bank President Christine Lagarde is expected to continue the 50 basis points (bps) rate hike cycle in March to tame the stubborn inflation.

EUR/USD technical outlook

EUR/USD is forming an Inverted Flag chart pattern near the horizontal support plotted from February 27 low at 1.0533 on a four-hour scale. The chart pattern indicates a long consolidation that is followed by a breakdown. Usually, the consolidation phase of the chart pattern serves as an inventory adjustment in which those participants initiate shorts, which prefer to enter an auction after the establishment of a bearish bias.

The Euro might continue facing selling pressure near the 20-period Exponential Moving Average (EMA), which is around 1.0583.

An oscillation in the 20.00-40.00 range by the Relative Strength Index (RSI) (14) indicates that the bearish momentum is currently active. The momentum indicator is not shown any sign of divergence and a situation of oversold.