EUR/USD bulls move in to test bearish commitments

• EUR/USD bears n charge at the start of the week. 
• Covid spread in China is playing havoc on risk sentiment. 

EUR/USD has been pressured at the start of the week. At 1.0712, the pair is down some 0.8% after falling from a high of 1.0815 to a low of 1.0696. Risk sentiment was poor and government bond yields slumped due to the  COVID-19 related shutdowns in China that are expected to compound supply chain restrictions, undermining prospects of a global recovery. 

The worsening of supply-chain restrictions in China is not only troublesome for the global economy and work trade, but they are also worrisome because it makes it harder for the Federal Reserve to control inflation in the US at multi-decade highs. nevertheless, the US dollar has picked up a safe haven bid and rallied to 101.856 on the day as per the DXY index. 

''A strong USD suggests that a sharp rebound in EUR/USD may be out of reach near-term.  That said, the tone of the June 9 European Central Bank meeting is likely to be instrumental in determining whether or not EUR/USD can make a moderate recovery,'' analysts at Rabobank said. 

''It is our central view that EUR/USD will end the year higher in the 1.10 area,'' the analysts added. ''This view has depended on the assumption that the ECB will have started to hike rates and on the coincident view that investors will be preparing for slower US growth next year.  The possibility of another Covid related wave of economic uncertainty coinciding with aggressive Fed tightening would likely result in a stronger for longer USD.''

Meanwhile, the media blackout ahead of the FOMC meeting is in effect and so there will be no Fed speakers until Chair Powell’s post-decision press conference the afternoon of May 4. instead, traders will look to the is week's US core March PCE reading Friday that will be important.  

PCE is expected to ease a tick to 5.3% YoY, but analysts at Brown Brothers Harriman said that they see upside risks given inflation data already reported for March.  'If so, expect another leg higher in US rates.''