EUR/USD Jumps on Report That the ECB Will Discuss an 0.5% Hike on Thursday

ECB to Consider an 0.5% Rate Hike?

The European Central Bank (ECB) is widely expected to lift rates for the first time in more than 10 years when it meets on Thursday. Back in June, the bank had laid out a clear plan for a 25 basis points increase this month and more moves ahead, of potentially larger size. ^[1]

However, the continent faces record high Inflation, with today's data showing that Eurozone's Consumer Price Index hit 8.6% year-over-year in June, from 8.1% prior.

The ECB is far behind its major counterparts, which have been tightening aggressively for a while now, This along with surging inflation, make a 25 basis point rate increase seem miniscule and potentially inconsequential.

A bolder move may be required to bring inflation down and a report by Reuters earlier, suggests that ECB officials will consider such action and a 50 basis points move at the upcoming meeting. ^[2]

ECB in a Bind

The clear communication for a 25 bps lift-off, may make it hard for the ECB to break away from this path, while fears of impending recession and a cut-off of Russian gas work in favor of a more cautious stance.

Nord Stream, which sends gas to Europe and Germany, shut down for a 10-day maintenance on July 11 and there are fears that the taps may not open after that, as retaliation for Western sanctions against Russia.

In any case, it is clear that there that there are those in the ECB who want bolder action and will push for that, but one has to be mindful of the internal clashes between factions.

Today's report by Reuters for the consideration of a larger hike, creates a tricky backdrop ahead of Thursday's meeting, as it could lead to disappointment if it does not materialize. This warrants even more caution, for an event that already had the potential to spur volatility.

Fed Expectation Cool Down

The US Federal Reserve has already delivered 150 basis points worth of rate hikes, with the last one being of a historic 0.75%, in order to bring down inflation. Last week's new jump in CPI Inflation briefly spiked market bets for a full percentage increase at the upcoming meeting, but Fed officials kept their cool and reined in market expectations.

Hawk Fed voters, Mr Bullard and Mr Waller advocated in favor of a 75 basis points move right before the communication blackout period ^[3], ^[4], in line with the clear guidance, as articulated by Mr Powell and in the minutes of the last policy meeting ^[5].

At the time of writing, CME's FedWatch Tool "agrees" with such an outcome, assigning an around 70% probability to it ^[6].

EUR/USD Analysis

The cool down of market expectations around the Fed has helped the pair to a strong weekly start, which jumped after today's Reuters report for the consideration of a more aggressive move by the ECB.

It gains nearly 1% today and eyes the critical 1.0310-50 region, which contains the 23.6% Fibonacci of the 2022 High/Low drop and the EMA200. A break above these levels could pause downwards bias and send the pair towards the next Fibonacci and the descending trendline from this year's high (1.0520-40).

However, it is early to judge whether this is the beginning of a larger recovery or just brief rebound, especially ahead of Thursday's ECB meeting that will likely determine the pair's trajectory.

From a technical prospective, EUR/USD still runs the risk of a return back to parity, but bears will need a strong catalyst to tackle 0.9856.