EUR/USD punches above parity, ECB next

EUR/USD continues to power forward and has breached the parity line for the first time since September 20th. The euro is red hot, having gained 2.1% this week, as the US dollar has hit a bump in the road and is lower against all the major currencies. In the North American session, EUR/USD is trading at 1.0069, up 1.02%.

The German economy, the largest in the eurozone, continues to show signs of weakness. September PMIs pointed to contraction in manufacturing and business activity, and these are unlikely to rebound as the Ukraine war continues and an energy crisis looms, with winter close by. The Ifo Business Confidence index fell for a fourth straight month in October and GfK Consumer Sentiment, which will be released tomorrow, is expected to remain deep in negative territory.

ECB expected to hike by 0.75%

The ECB meets on Thursday, with policy makers having to contend not only with a gloomy economic outlook in the eurozone, but also with spiralling inflation, with no sign of a peak. Eurozone CPI jumped to 9.9% in September, up sharply from the 9.1% rise in August. The markets have priced in a supersize 0.75% hike, which would bring the cash rate to 2.0% and investors will be looking for the Bank to declare its commitment to bring inflation back to the 2% target.

A jumbo full-point increase remains a slight possibility, given that inflation is close to double-digits. Investors will be monitoring the follow-up press conference, and the euro’s direction tomorrow could depend on ECB President Lagarde’s message to the markets. If Lagarde signals that further rate hikes are coming, the euro will likely gain ground. Conversely, a dovish stance from Lagarde could cut short the euro’s rally.

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EUR/USD Technical

• EUR/USD has broken above 0.9846 and is testing resistance at 0.9985. The next resistance line is 1.0095
• There is support at 0.9753 and 0.9643

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inflation
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us dollar