Euro Fundamental Backdrop

The euro has been testing parity several times this week but has yet to convincingly break below at this point. This sets up next week’s key risk event quite nicely with the ECB rate announcement scheduled on Thursday (see calendar below). Coinciding with the interest rate decision comes the expected resumption of Russian gas flows through the Nord Stream 1 pipeline on the same day and with political uncertainty at play, there is no guarantee that gas flows will resume.

The ECB has pre-announced a 25bps rate hike (which may not be the wisest choice) while the money market price is 30-35bps as of now. That points to the possibility of a hawkish surprise however the current Italian political backdrop will weigh negatively on this outcome (widening BTP/Bund spreads). Key points to consider for the meeting will include more guidance around anti-fragmentation along with a weakening euro which is heightening the inflationary impact on the consumer.

EUR/USD Economic Calendar

Source: DailyFX economic calendar
 

Technical Analysis

EUR/USD Daily Chart

(Click on image to enlarge)

Chart prepared by Warren Venketas, IG

Price action on the daily EUR/USD chart above highlights the inability of euro bears to convincingly pierce below the 1.0000 psychological support zone but current fundamentals do point to this being a matter of when not how. The December 2002 swing low would come into consideration should this occur at 0.9854 but a 50bps rate hike and Nord Stream 1 coming back online could invalidate this move and see EUR/USD focus on the 1.0210 resistance level.

Resistance levels:

• 1.0210
• 1.0122
• 1.0064 (76.4% Fibonacci)

Support levels:

• 1.0000
• 0.9854
   

IG Client Sentiment Data: Bullish

IGCS shows retail traders are currently LONG on EUR/USD, with 72% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment however due to recent changes in long and short positioning we arrive at a short-term upside bias.

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