EURUSD rallies towards 1.0250, hits 2-week highs on ECB 50bp upside odds

  • EURUSD price jumps to a nearly two-week high and is supported by a combination of factors.
  • Fading expectations of a more aggressive Fed rate hike in July continue to put pressure on the dollar.
  • News that the ECB will discuss a 50 basis point rate hike at its next meeting gives the Euro an additional boost.

The price of EURUSD attracted fresh buying near the 1.0120 area on Tuesday and soared to a nearly two-week high during the early part of the European session. The pair now trading around 1.0250up more than 1% on the day.

Sustained dollar selling continues to lend support

The US dollar extended its corrective pullback from two-decade highs for the third day in a row, amid the decrease in expectations for a more aggressive rate hike by the Federal Reserve in July. In fact, several members of the Federal Open Market Committee (FOMC) declared last week that they were not in favor of a higher rate hike than the markets expected after the publication of rising US consumer inflation. This, in turn, dragged the dollar to its lowest level since July 6 and offered some support to the EUR/USD pair.

News of a 50 basis point ECB rate hike boosted the common currency

The European Central Bank (ECB) will debate on Thursday at its monetary policy meeting the possibility of raising interest rates by 25 or 50 basis points to control inflation. A Reuters story added that policymakers were focusing on an agreement to provide bond market support to countries like Italy if they abide by European Commission rules on budget discipline and reforms. The news sent European bond yields higher, along with the euro. This was another of the factors that explained the last stretch of the sudden rally that occurred in the last few hours.

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Recession fears could weigh on the euro

Investors are followed worrying that the interruption of gas flows from Russia could trigger an energy crisis in the eurozone. This could drag the region’s economy into a faster and deeper recession, limiting the ECB’s ability to continue raising rates of interest. Economic risks could restrain bulls from opening aggressive positions on the common currency and limit any further EURUSD price advance, at least for now.

Fed hawkish expectations to limit USD losses

On the other hand, the Fed is still expected to raise interest rates further by the end of the year to control inflation, which accelerated in June to a new four-decade high. Speculation continued to support elevated US Treasury yields and supports the prospect of some buying at lower levels around the dollar. This could help limit the rise in the EURUSD price. Therefore, it will be prudent to wait for strong continuation buying before positioning for an extension of the recent recovery from the 0.9950 zone, or the lowest level since December 2002 touched last week.

Traders keep an eye on Eurozone CPI and US housing market data

Tuesday’s economic calendar includes the release of the Harmonized Consumer Price Index (IPCA) definitive of the Eurozone and US housing market data: with building permits and housing starts. This, coupled with US bond yields, could influence dollar price dynamics and allow investors to take advantage of some short-term opportunities around the EURUSD pair.

EURUSD Price Technical Outlook

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The price of EURUSD could face some resistance near the 1.0275-1.0280 before aiming at the level of 1.0300. This is closely followed by the upper bound of a short-term descending channel that has been running since the end of May, currently around the 1.0320, which if surpassed would be seen as a new catalyst for the bulls. The pair could then accelerate the momentum and aim to recapture the round level of 1.0400.

On the other hand, the level of 1.0200 seems to protect the immediate decline, which if broken could drag the EURUSD price towards the 1.0155-1.0145. Further selling would negate any positive short-term trends and make the pair vulnerable to a break below the level of 1.0100. The subsequent drop would expose the parity level and the yearly low, around the 0.9950.

Source: Fx Street

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