EUR/USD stalls as the greenback bulls rethink ahead of the Fed

• EUR/USD recovers from below parity and eyes key events. 
• The Fed and German inflation data are important for the week ahead.

EUR/USD bulls have moved in from below parity in a correction of three prior weeks of supply. The single currency ended down 0.13% on the final day of last week, falling from a high of 1.0255 and reaching a low of 1.0129. 

The euro has picked up a bid following a more hawkish rhetoric coming from the European Central Bank. The ECB has introduced a new Transmission Protection Instrument to keep sovereign bond yields in check while at the same time hiking rates by 50bps in a surprise move. 

However, at the same time, Italian politics has moved into the spotlight. ''The Italian political crisis was worsening while subsequent PMI data have suggested that recession risks for the Eurozone could be rising,'' analysts at Rabobank said.

''This news flow suggests that the ECB may be forced to show whether it can walk the walk and prevent a deepening crisis from developing in the region in the coming months. In view of recession risks, Italy’s collapsed government and a very strong USD, the ECB has a lot of cards stacked against it.''

The week ahead

Meanwhile, the week ahead will hold both key inflation numbers from the region as well as the Federal Reserve interest rate decision.

''German inflation likely fell for the second consecutive month due to a decline in fuel prices and a cut in energy taxes, while we think euro area inflation moved sideways in July,'' analysts at TD Securities said. 

''As we mentioned here, German and euro area inflation will remain “artificially” low until country-specific subsidies terminate at the end of August, thus resulting in a spike in September inflation.''

As for the Fed, the central bank is expected to follow up June's large 75bp rate increase with a similar move in July, lifting the target range for the Fed Funds rate to 2.25%-2.50%.