The number of ECB policymakers have been doubling down on the central bank’s position on interest rates and inflation, saying that higher rates are needed for longer to quell double-digit price pressures. In what looks like a concerted effort to re-assert the central bank’s authority and will on the rates market, the financial wires are full of hawkish ECB speak.

• ECB’s Martins Kazak recently said that there is no need to halt rate hikes this year and that the central bank should continue raising rates into 2023 as any recession is likely to be shallow and brief and won’t require any rate cuts.
• Board member and President of the Deutsche Bundesbank Joachim Nagel recently stated that large rate hikes are needed and that the ECB must not let up too early on normalizing.
• ECB Vice-President Luis De Guindos said that the central bank must continue raising rates to a level that ensures that inflation comes back into line.

The ECB hiked rates by 75 basis points at the end of October to 1.50%, its third consecutive hike and the highest level is seen since 2009. The central bank is expected to raise rates by another 50 basis points at the December 15 meeting.

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While the Euro has been boosted by expectations of higher rates, the US dollar is under pressure as traders start to look through higher US rate expectations and instead focus on when the Fed may pause its tightening cycle. Although this may be months away, the fact the markets are already looking for a turnaround is weighing on the greenback. Add into the mix this week’s US midterm elections, and which party may control either or both of the House and the Senate, and the US dollar will likely remain volatile in the days and weeks ahead.

EUR/USD is trading on either side of parity at the moment with momentum looking to push the pair higher. A series of short-term higher lows from late September is underpinning the move and a re-test of the late October double top around 1.0093 is the next target. A confirmed break of this level would nullify the medium-term series of lower highs and allow the pair to move back toward 1.0200.
 

EUR/USD Daily Forex Price Chart

(Click on image to enlarge)

Chart via TradingView

Retail trader data show 47.62% of forex traders are net-long with the ratio of traders short to long at 1.10 to 1.The number of traders net-long is 1.90% lower than yesterday and 14.01% lower than last week, while the number of traders net-short is 18.04% higher than yesterday and 25.67% higher than last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/USD-bullish contrarian trading bias.

What is your view on the EURO – bullish or bearish?

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