EUR/USD rallies into mid-1.0700s as euro bulls take control post-strong EZ GDP data/pre-Thursday’s ECB meeting

• EUR/USD has rallied into the mid-1.0700s despite broad buck resilience amid strong EZ GDP data ahead of Thursday’s ECB meeting.
• The ECB is expected to signal imminent rate hikes and any hawkish surprise could see EUR/USD test resistance around 1.0800.
• Friday’s US CPI is another key risk event for traders to keep an eye on.

The euro is the best performer of the major G10 currencies on Wednesday, lifting EUR/USD into the mid-1.0700s, even as the US dollar holds its ground reasonably well against most of its other G10 peers amid a rise in US yields. Indeed, the rise in yields in the Eurozone has been bigger, in wake of 1) positive revisions to Eurozone Q1 GDP growth estimates and 2) expectations for a very hawkish sounding ECB meeting on Thursday.

The ECB is expected to signal multiple imminent rate hikes as the bloc continues to grapple with rampant inflation that has reached well into double digits in some of its smaller, more Russo-Ukraine war-exposed nations. According to Reuters, money markets were last pricing a total of 75 bps of tightening by September, which implies a 50 bps rate hike at either the July or September meetings. That’s despite the fact that key ECB policymakers have sought to play down expectations for a 50 bps move and promote the idea of gradualism (i.e. 25 bps hikes) in recent weeks.

Anyway, the EUR/USD bulls are in charge and the pair is eyeing a test of recent highs near the 1.0800 level. A more hawkish than expected ECB (perhaps President Christine Lagarde openly endorses the idea of a 50 bps hike in the next few months) could be one catalyst to push the pair above 1.0800 and to fresh multi-week highs. Another catalyst could be if Friday’s US Consumer Price Inflation (CPI) data offers further evidence of easing US price pressures, which might encourage the market to pare back on Fed tightening bets.

Whatever the cause, a break above 1.0800 would open the door to a run higher to the next key area of resistance in the mid-1.0900s. Such a move would be consequential from a technical standpoint as many might interpret it as snapping EUR/USD out of the negative trend that it has more or less been locked within since May 2021.