EUR/USD Still Trying to Defend Parity, Despite Hot US CPI Inflation
EUR/USD Analysis
The pair has plunged this month and has been testing parity this week, for the first time in twenty years. The main driver behind the move is US Dollar strength, which pours from the Fed's aggressive and front loaded tightening cycle.
The US central bank had raised rates by a historic 0.75% last month, after the then surprisingly high inflation and had hinted at similarly-sized move in the upcoming July 26-27 meeting.
Yesterday's latest Inflation data put pressure on the Fed for potentially even larger increase, since headline CPI hit new four-decades high and has led to a repricing of market bets for a 100 basis points move.
The policy rate differential is detrimental for the common currency, since the European Central Bank (ECB) has pointed to rate lift-off this month, of just 0.25%, while markets have doubts around its tightening path. They fear that that Russia will cut-off gas supply to Germany after the current maintenance of Nord Stream and this will plunge Eurozone to recession.
EUR/USD is now vulnerable to 0.9856, although fresh impetus will likely be needed for a break, that would bring 0.9684 in the spotlight.
It is hard at this stage to see a meaningful rebound, as US Dollar strength trumps everything, but given the stark policy differential and the yesterday's US inflation jump, EUR/USD has shown significant resilience around parity for now.
We don't know if there is some reserve rebalancing by national central banks, but the ECB has so far refrained from any verbal intervention to support the Euro, which is interesting.
Of course, it can always hike rates by more than expected next week and that would probably help, while If the Fed sticks to its 0.5%-0.75% hike guidance, the pair could benefit.
Any recovery effort would encounter the first resistance at around 1.2000, while the 1.0334-1.0400 region could quash any more substantial rebound.
Caution is needed. given the historic nature of the recent moves and the many factors that are now in play.
Nikos Tzabouras
Senior Financial Editorial Writer
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
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