EUR: 

The Euro is rallying this morning following ECB sources that policymakers will discuss whether to raise interest rates by 25 or 50bps at this week’s meeting. Alongside this, the ECB is reportedly homing in on a deal to make new bond purchases conditional on Next Generation EU targets and EU fiscal rules.

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EUR/USD Chart: Intra-day time frame

Source: IG

Consequently, money markets are now pricing 40bps worth of tightening at this week’s meeting and circa 100bps of hikes by the September meeting. It is worth noting that the recent meeting minutes did highlight that a number of members had expressed a preference for leaving the door open for a larger hike at the July meeting. This view had been echoed by ECB’s Holzmann, Simkus and Kazaks. Therefore, this would suggest that a discussion of a larger hike was already within the plans for this week. However, despite the extremely uncertain macroeconomic environment, the ECB has felt the need to restrict themselves to their sequencing by not raising rates at last month’s meeting and also pre-committing to a 25bps at this week’s meeting. As such, the question now is that with the inflation outlook continuing to deteriorate are these sources an indication that the ECB is willing to break away from its forward guidance. To me this would make sense, particularly in the current environment, we have also seen similar action from the Federal Reserve.

On the technical front, the move in the EUR/USD looks corrective with key topside areas yet to be breached. A break through the 1.0340 lows and the 50DMA would be needed to increase confidence that this is more than a correction. To me, the Euro remains in a downtrend, although, the outlook will be much clearer after we have clarity on Russian gas flows and Italian politics.

EUR/USD Levels to Watch

Resistance - 1.0340-50 (2017-2022 lows), 1.0485-90 (Jun 30/Jul 1st highs/55DMA).

Support – 1.0000 (Parity/Round Number), 0.9952 (YTD low).

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