EUR/USD reclaims parity, despite some ECB officials taking a dovish stance

• EUR/USD is seesawing around parity after mixed ECB official signals.
• Upbeat US Retail Sales confirms the case of the Fed going 75 bps.
• ECB officials emphasized the need to hike rates;
• ECB official Mario Centeno expressed that the central bank should take “as small steps as possible.”

The EUR/USD is positive in the day for the second-straight day but faces solid resistance around the parity on woes of a large US Federal Reserve rate hike, spurring a jump in US Treasury bond yields. However, the shared currency remains resilient, though slightly up by 0.19%, amidst a risk-off environment.

During the day, the EUR/USD began trading at around 0.9980, sliding toward the daily low at 0.9955 in the early European session. However, fresh bids lifted the shared currency towards hitting the daily high at 1.0018 before settling at the current spot price. At the time of writing, the EUR/USD is trading at 1.0002.

US economic data released before the Wall Street open and during the beginning of Thursday’s trading session further cemented the Fed’s case for going aggressive, as shown by money market futures odds at 80% of increasing rates by 75 bps and 20% chances of going 100.

The US Commerce Department reported that Retail Sales in August jumped by 0.3% MoM, higher than expectations of a 0.1% contraction, while the annual base reading was 9.37%, less than the previous month’s data. At the same time, the Department of Labor showed that unemployment claims for the past week, ending on September 10, decreased to 213K, lower than economists’ estimates of 227K, showing the labor market’s resilience.

The EUR/USD barely reacted to data, though it brought the major under parity. Meanwhile, the US Dollar Index, a gauge of the buck’s value vs. its peers, is recovering from earlier losses, up 0.10%, at 109.751.

Of late, a tranche of manufacturing data revealed by regional Fed banks began with the New York Fed Empire State Index and the Philadelphia Fed Index. The New York Fed Index showed signs of improvement though remains in contractionary territory, while the Philadelphia Fed index dropped to the contractionary part after rebounding in the August report.

ECB officials continue expressing the need for hiking rates due to high inflationary pressures on the Eurozone side. Philip Lane, ECB Chief Economist, said, “We expect that this transition will require us to continue to raise interest rates over the next several meetings. The appropriate size of an individual increment will be larger, the wider the gap to the terminal rate and the more skewed the risks to the inflation target.”

Later, ECB Vice-President Luis de Guindos commented that price pressures continued to elevate while adding that the euro’s depreciation added to “these inflationary pressures.”  In the meantime, ECB official Mario Centeno expressed that the central bank should take “as small steps as possible” in hiking rates not to destabilize the economy, a signal perceived as dovish by market players. He emphasized that monetary policy “must remain predictable.”

EUR/USD traders should note that a part of the German bond yield curve briefly inverted on Thursday, signaling investors’ worries that an aggressive ECB might lead to an economic slowdown.

What to watch

The Eurozone calendar will feature inflation readings in the bloc and Italy. On the US side, the economic docket will feature the University of Michigan Consumer Sentiment and inflation expectations.

EUR/USD Key Technical Levels