EUR/USD fades a spike to 1.2215 as USD regains poise

• DXY flirts with six-week tops near 90.70.
• Monetary policy divergence back in play.
• All eyes on US core PCE, ISM manufacturing PMI and Powell Round 2.

The demand for the greenback returned to the markets in Europe, now pushing the EUR/USD pair back below the 1.22 handle, as investors digest the mixed final manufacturing PMI reports from the Euro area economies.

EUR/USD headed to 1.2150?

The recovery in EUR/USD lost legs ahead of the 1.22 handle, sending the rates back towards the seven-week troughs of 1.2184 reached at Tokyo open, as the USD bulls jumped back on the bids heading into the crucial US macro releases and round 2 of Powell’s speech.

The US dollar is the preferred currency across the fx space over the last few trading sessions, as a hawkish surprise delivered by the new Fed Chair Powell during his Congressional testimony, advocated the case for aggressive Fed rate hikes this year.

On the other hand, the ECB President Draghi’s renewed concerns over the inflationary pressures are likely to keep the ECB in a wait-and-see mode in the coming month, thus, bringing monetary policy divergence between both continents back in play.

More so, a slew of mixed manufacturing sector activity reports from the Euroland also added to the latest leg down in the spot, as upbeat factory data from Eurozone and Germany were negated by the below estimates French and Italian manufacturing numbers.

Markets eagerly await the US economic releases and round 2 of the Fed Chair Powell’s testimony (before the Senate Banking Committee) for the next direction.

EUR/USD levels to watch

Karen Jones, Analyst at Commerzbank, noted: “EUR/USD’s outlook stays negative. It has eroded 2 support lines to leave the market under pressure and sold off to its 55 day ma at 1.2183. Rallies are expected to be tepid and remain capped by 1.2329, the 20 day ma. We have a number of intraday signals to suggest that the market will see a small rebound and will cover our short positions for now. We maintain an overall negative bias following the recent divergence of the weekly RSI.”