EUR/USD rises on dollar weakness and speculation of 50bp ECB hike

• EUR/USD rises above 1.0200, extending its weekly gains to more than 1.50%.
• Eurozone inflation rose 8.6% year-on-year, in line with estimates and previous readings.
• EURUSD received a boost from ECB sources who commented that policy makers could discuss a 50 basis point rate hike.

The EUR/USD advanced strongly, carrying out earlier sentiment during the European session, courtesy of a “leak” that the ECB could raise rates by more than 25 basis points at the July meeting, causing the EURUSD to jump from 1.0160 towards daily highs, away from the 1.0270 area. However, as the American session started, the sudden bounce in EUR/USD pulled back towards the 1.0240 area, up almost 1%.

EURUSD was bolstered by a boost in risk appetite, as evidenced by the rally in global equities. The greenback continues to slide, as evidenced by the US dollar index (DXY), which fell 0.82% to 106.542 during the day. Notably, once DXY hit a new 24-year high, the index sank more than 2.50% as safety outflows sparked a dollar sell-off. Meanwhile, 10-year US Treasury yields rise above the 3% threshold, up three basis points.

Eurozone inflation in line with estimates

EU inflation rose 8.6% annually

Early in the European session, Eurostat released the EU HICP for the month of June, revealing that inflation rose by 8.6% year-on-year, in line with estimates and the May reading. The basic figures showed an expansion of 3.7% year-on-year, indicating that for two consecutive months the IPCA has stabilized. However, EURUSD traders should note that something similar happened in the US before seeing a resumption of US inflation to the upside.

ECB sources leak a possible rate hike of 50 basis points

ECB sources “filter” a rise of 50 basis points

Meanwhile, Reuters reported that ECB policymakers may discuss a 25 to 50 basis point rate hike. Money market STIR futures immediately have an 82% chance of the ECB rising 50 basis points, while pricing in a 100% 25 basis point, something EURUSD traders should watch out for. Additionally, the ECB is preparing an anti-fragmentation tool for peripheral countries like Italy, as the ECB works to reduce spreads between the German Bund and BTPs.

EU energy crisis slows EURUSD’s rise
Financial analysts remain concerned about the ongoing energy crisis in the euro zone. The EU Commission was concerned about the interruption of flows from Russia in the Nord Stream 1 gas pipeline, which would increase the bloc’s chances of a recession. However, positive news emerged as gas flows through Nord Stream 1 will resume after the annual maintenance on July 21, but at reduced levels, according to Reuters. The news was positive for EURUSD as it eased recessionary stresses which could trigger bullish pressure on the major currency which will benefit bulls as dollar buyers continue to book profits ahead of rallies. monetary policy of the ECB and the Fed.

US Recession Fears Remain as US 2yr-10yr Yield Curve Remains Inverted

Meanwhile, the US 2yr-10yr yield curve extends its inversion for the 11th day in a row, albeit shallower than in previous days. At time of writing, the spread has widened to -0.201% as traders’ recession fears remain. However, unless Fed policy makers raise concerns about economic growth, that will not deter them from aggressive tightening, which is negative news for EURUSD longs going forward.

ECB spreads against the Fed will narrow if the ECB surprises the market

The ECB and the Federal Reserve will hold their monetary policy meetings in July. Currently, the ECB deposit rate stands at minus 0.50%, while the Federal Funds Rate (FFR) of the US Federal Reserve is at 1.75%, which reinforces the appetite for the greenback . With the ECB expected to move up 50 basis points and the Fed moving at least 75 basis points, spreads would tighten further, down to 0.00% (ECB) vs. 2.50% (Fed), meaning the dollar Green would keep the advantage. However, sources leaking that the ECB could hike 50 basis points could open the door for further gains in EURUSD.

EURUSD Price Technical Outlook

EURUSD buyers have entered the major, which has broken above the 1.0250 mark for the first time since July 6th. However, the major still has a bearish bias, with the daily moving averages (DMAs) sitting well above the spot price. However, the EURUSD bounce on Tuesday gave shorts a better entry price if the ECB fails to deliver a 50 basis point rate hike. Also, the ECB meeting could be a “buy the rumour, sell the fact” event, where either way the ECB goes, the EURUSD could fall further as traders have priced in the ECB going to 50.

That said, if the EURUSD heads higher, it will find resistance at 1.0300, followed by the May 13 low at 1.0348 and then 1.0400. On the other hand, the first support of the EURUSD would be 1.0200. A break of the latter will expose the 1.0100 figure, followed by the 20-year low at 0.9952.