The EUR/USD currency pair reversed half of its July slide in a rally that could be an early warning of a market reversal point that is likely to bring relief to many currencies from the US dollar’s recent unrelenting rally. The EUR/USD pair rallied towards the 1.0272 resistance level for the first time in 11 years after the European Central Bank indicated a half-point hike today. The EUR/USD was settling around the 1.0220 level at the time of writing, hours ahead of the bank’s important announcement.
advertisement
The euro’s gains came after Retuers and Bloomberg News reported Thursday could see the European Central Bank (ECB) hike interest rates sharply. “Chief Economist Philip Lane will make a formal proposal at the meeting and markets are now trying to gauge how many board members would like to support such a move,” said Chris Turner, global markets analyst at ING. Given the deteriorating growth prospects in Europe, Harding remains surprised to see the euro (from a broad perspective) sustainably boosted, a challenging task.
EUR/USD economic data
On Thursday, reports suggested that the European Central Bank will consider the idea of an immediate end to the era of negative interest rates in Europe by raising its three criteria for the cost of borrowing by 0.50%, which could increase negative interest rates on deposits with commercial banks zero. A 0.50% step today would be larger than a 0.25% step, which was far from what was previously agreed by the Governing Council in June, and could therefore be more effective in limiting the extent to which which the ECB risks further unwinding Fed policy.
The euro’s exchange rate against the dollar has already tested the 1.02 resistance since the start of this week’s trading, after paring nearly half of its July slide in trading sessions that followed last Wednesday’s US inflation numbers. This will also have important implications for the EUR/USD outlook.
Currently, the futures markets are valued at around 81 basis points for the July session. These declining expectations are also keeping the upside potential of US 10-year Treasury yields and the downside potential of the EUR/USD pair in check,” said Philip Marie, Senior Analyst at Rabobank.
Last week’s US inflation data was dismal, showing another 9.1% annual interest rate hike and renewed month-on-month acceleration in core inflation, but Fed officials were quick to throw cold water on the idea that this is worth a faster rise could be pace of rate hikes.
Jonathan Cohn, interest rates trading analyst at Credit Suisse, commented, “The price action may have understandably spooked them as it now appears that rate hikes come at a price.” He added, “The adverse nature of frontloading amid recession fears means forecasts often further exacerbate fears, leading to lower long-term yields and easing financial conditions on the web.”
Overall, cold water was poured in as three members of the Fed’s Rate Setting Committee were quick to point out that the current plan of raising rates in 0.5% or 0.75% increments to moderately constrained levels was still the most appropriate. Recent comments from Federal Reserve officials lowered market expectations for US interest rates, and that adjustment was subsequently reinforced after a University of Michigan survey showed that consumers’ long-term inflation expectations fell in July.
This is notable given that central banks believe that inflation expectations are self-fulfilling prophecies and that many of their interest rate policies are aimed at low inflation.
EUR/USD forecast today:
The EUR/USD will remain in a tight range around its gains until the European Central Bank announces the magnitude of the rate hike and the tone of the monetary policy statement. Lagarde’s remarks will determine the future of the euro or evaporate quickly. I still prefer to sell EURUSD from any bullish levels as it continues to feel pressure from the economic recession given Russia’s threat to Europe’s energy sector. The closest targets currently stand at 1.0285, 1.0335 and 1.0420 respectively.
On the other hand, stability of the currency pair below the 1.0075 support level will be important to push the Euro-Dollar higher when the parity price is strong again.
Comments are closed.