Euro May Be About to Drop Below Parity Against the US Dollar: Top Trading Opportunities

[MongiIG]

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 seemingly 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

 

Jul 14, 2022 | DailyFX
Ilya Spivak, Head Strategist, APAC

[MongiIG]

Navigating EUR/USD Around Parity: Trade Setup and Levels Ahead of ECB

Jul 14, 2022 | DailyFX
Richard Snow, Analyst

EUR/USD ANALYSIS

• July 21st – crucial for the euro: ECB rate decision, eve of Nord Stream resumption
• EUR/USD range potential around parity as the psychological level holds, for now.
• IG Client Sentiment reaches extreme levels as trades attempt to call a bottom

JULY 21ST IS A CRUCIAL DATE FOR THE EURO

The 21st of July is key, not just because it marks the ECB rate setting announcement but also because it coincides with the final day that the Nord Stream pipeline is scheduled to be offline for maintenance. Recently, the possibility of Russia halting the return of gas the EU’s largest economy made news as the German Economy Minister announced that plans are in place for any eventuality. Nevertheless, the threat of gas rationing and factory shutdowns are a real possibility if Germany is unable to stock up on sufficient gas before the winter months – weighing on the euro.

Customize and filter live economic data via our DaliyFX economic calendar

After analyzing the top scheduled risk events for next week, it appears unlikely that even if we see shock moves lower in retail sales and Michigan consumer sentiment that markets would ease off on rate hike expectations that are helping support the dollar.

Therefore, if we are to see any lift in EUR/USD before the ECB meeting it could very well appear if we see a sizeable upward surprise in EU inflation data. The ECB has done its utmost to communicate a 25 basis point hike next week. However, some within the ECB’s governing council weren’t able to rule out the possibility of a 50 bps move – which could have an adverse effect on periphery bond yields and support the value of the euro via elevated rate hike expectations.