Forex - EUR/USD edges higher but downside risks remain

Forexpros – The euro edged higher against the U.S. dollar on Tuesday, recouping some of the previous day’s sharp losses, but the single currency remained vulnerable amid growing fears over the global economic outlook.

EUR/USD hit 1.4247 during late Asian trade, the daily high; the pair subsequently consolidated at 1.4211, gaining 0.23%.

The pair was likely to find support at 1.4054, the low of August 5 and a two-week low and resistance at 1.4425, Monday’s high.

The euro dropped sharply against the greenback on Monday, tumbling nearly 1.7%, as market sentiment was rattled following an historic downgrade of U.S. government debt by ratings agency Standard & Poor’s.

Meanwhile, a move by the European Central Bank to purchase Italian and Spanish government bonds failed to ease fears that the debt crisis could spill over to the region’s third and fourth largest economies.

Adding to global concerns, a report from China’s National Bureau of Statistics showed that consumer price inflation rose by a seasonally adjusted 6.5% in July, the fastest pace in three years.

The stronger-than-expected inflation data dampened hopes that the world’s second largest economy would loosen monetary policy in the near-term.

The euro was also up against the pound, with EUR/GBP adding 0.33% to hit 0.8717.

Earlier in the day, government data showed that Germany’s trade surplus narrowed in line with expectations to EUR11.5 billion in June, down from May’s surplus of EUR12.9 billion.

Later Tuesday, the U.S. is to publish preliminary data on nonfarm productivity and labor costs. In addition, the Federal Reserve is to announce the federal funds rate. The announcement will be followed by the bank’s rate statement.