EUR/USD fell to a fresh 1-month low on Wednesday but shorts seem restrained, with rising euro zone inflation expectations ahead of an ECB meeting -- as well as options and technicals -- hinting at modest upward potential.
Euro zone 5-year/5-year inflation linked swaps EUIL5YF5Y=RR rose to their highest on record according to Refinitiv data going back to 2013 nL5N2WB1QC, which could allow for more hawkish sentiment from the ECB after its meeting on Thursday.
Options markets could help drive a corrective rally in EUR/USD, with risk reversals EUR1MRR=FN indicating vol premiums for EUR/USD puts over calls are eroding, implying less concern about a downside move.
Protective bids ahead of a likely 1.0800 barrier has helped limit the downside, and short covering could result if the barrier is not broken soon.
Daily and monthly RSIs are falling but also nearing oversold territory, which could lead to upward pressure to unwind those readings unless a new bearish catalyst emerges for EUR/USD.
However, EUR/USD gains should remain limited, with elevated U.S. inflation nL2N2WA26I likely to keep the Fed hiking and proceeding toward balance sheet reduction, encouraging longer-term bears to continue selling rallies.
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