The Euro stabilized in the second quarter – pausing a downtrend in play since December 2020 – as ECB officials finally signaled a readiness to act against surging inflation. The headline CPI rate hit an eye-watering rate of 8.1 percent in May. The currency found a floor and began to inch upward as rate hike expectations began to be absorbed into prices.

Speculation culminated on June 9, as the ECB formally announced incoming interest rate hikes. The central bank previously said it would end bond purchases – a form of non-standard stimulus – in July. Less than a week later, an emergency meeting was scrambled and a mandate to create a new tool against ‘fragmentation’ given.

That stopped the Euro’s ascent in its tracks. ECB tightening expectations revived worries about high levels of debt in some Eurozone economies. The spread between Italian and benchmark German 10-year government bond yields widened sharply to a two-year high of 242 basis points (bps) after June’s policy meeting.

Managing ‘fragmentation’ – that is, diverging lending rates across Eurozone states – now seems like it will necessarily keep ECB tightening modest relative to global peers. That puts the single currency at an acute disadvantage, suggesting the downtrend is due to resume.

EURO DOWNTREND STALLS AS ECB RATE HIKE BETS SURGE (WEEKLY CHART)

Chart created with TradingView, prepared by Ilya Spivak

EUR/USD chart positioning is at a pivotal juncture in the meantime. Looking at the monthly chart, prices are sitting on support at the bottom of a range that has capped downside progress since March 2015. Breaking below this barrier may set the stage for the next big leg in the structural decline from the peak above 1.60 in 2008.

A monthly close below 1.0340 would look like confirmation of a breach, with the next move after that seems set to bring the exchange rate below the closely watched parity level. Long-term Fibonacci extensions approximate next steps, with noteworthy inflection points seen at 0.9707 (50%) and 0.9034 (61.8%).

On the topside, immediate resistance levels come in at 1.0885 and 1.1239. A rebound that brings prices through these barriers is likely to put the multi-year congestion zone capped at 1.1727 back into focus. Still, further above that is trend-defining support-turned-resistance running up into 1.2538.

EURO TESTING SEVEN-YEAR RANGE FLOOR VS. US DOLLAR (MONTHLY CHART)

Chart created with TradingView, prepared by Ilya Spivak

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