EURUSD through the roof beyond 1.0400, or 3-month peaks

• EURUSD regains the upside and surpasses 1.0400 on Tuesday.
• The dollar plummets to new 3-month lows near 106.00.
• ECB’s Villeroy opened the door to more flexible rate hikes.

The rapid drop in the dollar allows EURUSD to climb to fresh 4-month peaks past 1.0400 on turnaround Tuesday.

EURUSD in multi-month highs

EURUSD advances further and revisits levels last traded back in early July and is already flirting with the critical 200-day SMA, today near 1.0430.

Indeed, the pair navigates the second consecutive week with gains sustained by the persistent weakness hurting the greenback, as investors continue to reprice a potential Fed’s pivot in its policy in the near term.

From the ECB’s backyard, board member Villeroy advocated during early trade a more flexible and slower pace of rate hikes in the future, at the time when he added that jumbo rate hikes won’t become a new trend. He also welcomed last week’s lower-than-expected US inflation figures.

In the domestic calendar, another revision of the Q3 EMU GDP is due seconded by the ZEW Economic Sentiment in both Germany and the euro area. Across the pond, Producer Prices will be in the limelight.

What to look for around EUR

EURUSD comes back stronger following Monday’s hiccup and breaks above the key 1.0400 barrier to print fresh multi-month highs.

In the meantime, price action around the European currency is expected to closely follow dollar dynamics, geopolitical concerns and the Fed-ECB divergence. In addition, markets repricing of a potential pivot in the Fed’s policy has become the exclusive source of the sharp advance in the pair in recent sessions.

Back to the euro area, the increasing speculation of a potential recession in the region - which looks propped up by dwindling sentiment gauges as well as an incipient slowdown in some fundamentals – emerges as the main headwinds facing the euro in the short-term horizon.

Key events in the euro area this week: EMU Flash Q3 GDP, ZEW Economic Sentiment, Germany ZEW Economic Sentiment (Tuesday) - ECB Financial Stability Review, ECB C.Lagarde (Wednesday) - Final EMU Inflation Rate (Thursday) - ECB C.Lagarde (Friday).

Eminent issues on the back boiler: Continuation of the ECB hiking cycle vs. increasing recession risks. Impact of the war in Ukraine and the persistent energy crunch on the region’s growth prospects and inflation outlook.

EURUSD levels to watch

So far, the pair is gaining 0.76% at 1.0405 and faces the next up barrier at 1.0417 (monthly high November 15) seconded by 1.0427 (200-day SMA) and finally 1.0614 (weekly high June 27). On the other hand, a breach of 1.0026 (100-day SMA) would target 0.9935 (low November 10) en route to 0.9730 (monthly low November 3).