The euro is showing some strength, after posting a winning week for the first time in a month. EUR/USD is trading at 1.0143, up 0.55% on the day.
After a dramatic drop below the parity line last week, for the first time in 20 years, the euro has rebounded and is trading above the 1.01 level. The euro rode on the coattails of a rally in the US equity markets, which gave a thumbs up to solid US data on Friday. Headline retail sales and core retail sales both posted a gain of 1.0% MoM in June, above the forecast and an improvement from the May numbers. As well, UoM Consumer Sentiment improved slightly to 51.0, above the consensus for a contraction at 49.0.
The fickle stock markets rallied on the US numbers, despite the fact that strong data could increase the likelihood of a whopping 100bp hike by the Fed this week. The Fed is determined to stamp out spiralling inflation, which rose to 9.1% in June, and positive data points to a resilient economy which can withstand sharp rate hikes. There is a pre-meeting blackout out of the FOMC ahead of Thursday’s meeting, but the likelihood of a 75bp vs. a 100bp hike stands at 70/30, according to the CME Group. It will be interesting to see if the markets change their pricing ahead of the meeting, even with a blackout in place.
As for the euro, there are two key events on Thursday which could have a dramatic impact on the movement of the currency. First, the ECB is widely expected to lift-off rate hikes at a policy meeting, after years of an accommodative policy. This will mark the first rate hike in 11 years, but a modest 0.25bp rise, the most likely scenario, will have little impact on soaring inflation. If, however, the ECB delivers a hawkish surprise are raises rates by 50bp, the euro could respond with gains.
On the same day, the Nord Stream 1 gas pipeline, the conduit for Russian gas exports to Germany, is scheduled to restart after a short break for maintenance. If Moscow doesn’t turn on the gas tap before the weekend, we could see the markets take fright over a potential energy crunch in Europe and send the euro back towards the parity line.
- EUR/USD is testing support resistance at 1.0124. Above, there is resistance at 1.0197
- The pair has support at 1.0075 and 0.9965
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