EURUSD rallies on a soft US dollar and speculations of the ECB hiking 50 bps

• EURUSD climbs above the 1.0200 figure, extending its weekly gains to more than 1.50%.
• The Eurozone inflation rose by 8.6% YoY, in line with estimations and previous readings.
• The EURUSD got a boost by ECB sources commenting that policymakers might discuss 50 bps rate hikes.

EURUSD advances sharply, carrying out earlier sentiment during the European session, courtesy of a “leak” that the ECB might hike rates more than 25 bps in the July meeting, which caused a jump in the EURUSD from 1.0160 towards daily highs shy of the 1.0270 area. However, as the New York session began, the EURUSD sudden bounce retreated towards the 1.0240 area, up by almost 1%.

The EURUSD got bolstered by a risk-on impulse, as shown by worldwide equities climbing. The greenback remains on the backfoot, as demonstrated by the US Dollar Index (DXY), tumbling 0.82%, at 106.542, during the day. Worth noticing that once the DXY reached a fresh 24-year high, the index sank more than 2.50%, as safety outflows ignited a US Dollar selloff. In the meantime, the US 10-year Treasury yield ascends above the 3% threshold, up by three bps.

Also read:

• Eurozone final inflation confirmed at 0.8% MoM in June
• ECB policymakers to discuss rate hike worth 25 bps or 50 bps at Thursday’s meeting – Reuters

Eurozone inflation in line with estimations

EU Inflation rose by 8.6% annually based

Earlier in the European session, Eurostat reported the EU HICP for June, unveiling that inflation rose by 8.6% YoY, aligned with estimates and with May’s reading. The core figures showed an expansion of 3.7% YoY, signaling that for two consecutive months, HICP has stabilized. However, EURUSD traders should be aware that in the US, something similar happened before seeing a resumption of US inflation to the upside.

ECB sources leak a possible 50 bps rate hike

ECB sources "leaked" a 50 bps hike

In the meantime, Reuters reported that ECB policymakers might discuss a 25 of 50 bps rate hike. The money market future STIRs immediately have an 82% chance of the ECB increasing 50 bps while pricing in a 100% of 25 bps, something that EURUSD traders should be aware of. Alongside that, the ECB is preparing an anti-fragmentation tool for peripheral countries like Italy as the ECB scrambles to tighten the spreads between the German Bund and the BTPs.

EU’s energy crisis put a lid on the EURUSD rally

Financial analysts remain concerned regarding the ongoing energy crisis in the Euro area. The EU Commission was worried that flows from Russia in the Nord Stream 1 pipe would be halted, increasing the bloc’s chances of recession. Nevertheless, positive news emerged, as gas flows through the Nord Stream 1 will resume following the annual maintenance on July 21, but at reduced levels, according to Reuters. The news was positive for the EURUSD, easing recession tensions, which could trigger upside pressure on the major, which will benefit bulls, as USD buyers are still booking profits ahead of the ECB and Fed monetary policy meetings.

US recession fears remain as the US 2s-10s yield curve stays inverted

In the meantime, the US 2s-10-yield curve extends its inversion for the eleventh straight day, though less profound than on previous days. At the time of writing, the spread widened to -0.201%, as traders’ fears about recession remain. Nonetheless, unless Fed policymakers express concerns about economic growth, that would not deter them from aggressive tightening, which is negative news for EURUSD longs in the future.

ECB vs. Fed differentials will tighten if the ECB surprises the market

The ECB and the Federal Reserve will host their monetary policy meetings in July. Currently, the ECB’s deposit rate lies at minus 0.50%, while the US Federal Reserve’s Federal funds rate (FFR) is at 1.75%, bolstering the appetite for the greenback. With expectations of the ECB hiking 50 bps and the Fed to move at least by 75 bps, differentials would tighten further, to 0.00% (ECB) vs. 2.50% (Fed), meaning that the greenback would keep the upper hand. Nevertheless, sources leaking that the ECB might go 50 bps might open the door for further gains on the EURUSD.

EURUSD Price Technical outlook

EURUSD buyers have stepped in the major, which rallied above the 1.0250 mark for the first time since July 6. Nevertheless, the major remains downward biased, with the daily moving averages (DMAs) residing well above the spot price. However, the EURUSD bounce on Tuesday gave shorts a better entry price if the ECB fails to deliver a 50 bps rate hike. Additionally, the ECB meeting could be a “buy the rumor, sell the fact” event, in which either way the ECB goes, the EURUSD might fall further, as traders have discounted an ECB going 50.

That said, if the EURUSD aims upwards, it will find resistance at 1.0300, followed by the May 13 low at 1.0348 and then 1.0400. On the flip side, the EURUSD’s first support would be 1.0200. A breach of the latter will expose the 1.0100 figure, followed by the 20-year low at 0.9952.

EURUSD price: reversal targeting 1.0340 monthly resistance