• The euro dips further end hits session lows near 1.1600.
• The USD firms up on inflation fears.
• EUR/USD is expected to return below 1.1600 – Scotiabank.

The euro has extended its reversal from week-highs at 1.1665 to hit fresh session lows at 1.1600 during Thursday's late US session. The pair is giving away gains, after a three-day rally, weighed by higher demand for USD amid a sourer market sentiment.

The US dollar picks up on inflation concerns

The common currency has been trading on a soft tone as the risk rally witnessed on previous days faded. Quarterly earnings have failed to lift spirits and concerns about the surging inflation and supply chain disruptions have returned to the spotlight, boosting demand for safe assets against riskier currencies like the euro.

Furthermore, US T-Bond yields have resumed their rally, with the US benchmark 10-year note hitting 4-month highs at 1.68%. The market is assuming that the persistently high inflation will force the Federal Reserve to accelerate its monetary policy normalization plan, which has provided additional support to the greenback.

On the macroeconomic front, US data has been mixed. Weekly jobless claims have dropped to their lowest levels in 19 months and existing home sales increased 7.0% to 6.29 million in September, the highest reading since January. On the other hand, The Philadelphia Fed Manufacturing survey dropped to 23.8 from 30.7 in the previous month.

EUR/USD: Seen returning below 1.1600 – Scotiabank

The FX Analysis team at Scotiabank, e3xpects the pair to decline further on Friday, to end the week below 1.1600: “Friday’s release of preliminary PMIs in the eurozone that will likely reflect the impact of high energy prices in the region. However, with the hit to manufacturing generally expected, only a large data miss could see the EUR/USD fall under the key 1.16 level. (…) The intraday low of ~1.1635 is support followed by 1.1600/15. Resistance is 1.1665/85.”

Technical levels to watch