Trade of the Week: Will ECB help EURUSD end its monthly losing streak?

Euro bulls are desperate for any form of solace from the rampant US dollar.

The world’s most-popular FX pair, EURUSD, has endured 5 consecutive months of declines. In fact, EURUSD has only managed one monthly gain so far in 2022, which was back in May.

To be fair, at the time of writing, EURUSD is holding on to a 0.5% gain so far in October.

 

Whether EURUSD can officially claim a gain for the entirety of October and break this monthly losing streak could all boil down to the European Central Bank policy meeting this Thursday, October 27th.

 

What to look out for?

• Size of the rate hike: Markets are forecasting a 89% chance that the ECB will hike its benchmark rates by yet another 75-basis points (bps), as they did back in September.
   
• Lagarde’s press conference:  Traders and investors worldwide will be closely monitoring the words used by ECB President Christine Lagarde during her press conference at 2:45PM GMT, just half an hour after the ECB’s Governing Council publishes its policy decision.
  
  Given the forward-looking nature of markets, traders and investors worldwide will be ready to react to what ECB President Christine Lagarde’s latest clues on the central bank’s next policy moves.

 

How might EURUSD react?

• If the ECB disappoints markets and triggers a smaller-than-75bps hike, that could see EURUSD faltering once more.
   
• If the ECB shocks markets with a gargantuan 100-bps hike, that could see EURUSD breaking substantially above its 50-day SMA.
   
• If a 75bps hike materialises, that may offer little reaction in the euro, given that such a move is already the primary outcome that markets are expecting.
   
• If Lagarde suggests that we’ve not seen the last of these 75bps hikes, perhaps leaving the door open for another such supersized move at subsequent meetings, that may help the euro recover.
   
• However, if Lagarde’s press conference or the ECB Governing Council’s policy statement unveils greater concern over incurring too much economic damage with the ongoing inflation-fighting rate hikes, that may unwind the euro’s month-to-date gains.

Expect a combination of the scenarios stated above.

 

Key levels to look out for:

1. RESISTANCE: 50-day simple moving average (SMA) 
   
   Since March, EURUSD has struggled to sustain consecutive daily closes above its 50-day SMA. This FX pair has been guided lower by this widely-known technical indicator, with this key resistance level yet again holding its ground so far today (Monday, Oct 24).
   
    
2. STRONGER RESISTANCE: 1.000 a.k.a. parity 
   
   If EURUSD has enough reason to see a substantial upside break, then stronger resistance is set to arrive at the parity mark, which had already repelled EURUSD bulls earlier this month.
   
    
3. SUPPORT: Recent cycle lows

• 0.97049
• 0.96313
• 0.95357
  
  These support levels may be called into action once more this week, especially if the ECB fails to assure markets that the central bank’s fight against inflation will not cause too much damage to the Eurozone economy.

 

At the time of writing, markets are forecasting greater odds of 69.3% that EURUSD would touch the 0.990 mark over the next one week period, versus the less-than-even chance (45.5%) that EURUSD would touch 0.970.

Sustained EURUSD gains this week may require a hawkish ECB that can convince markets of its ability to keep hiking rates aggressively.

 

Trade of the Week EURUSD Euro European Central Bank ECB ECB rate hikes inflation