EUR/USD has stabilized today, after sliding 1.0% on Wednesday. In the European session, EUR/USD is trading at 1.0009, up 0.09%.
All eyes on ECB
What can we expect from the ECB at today’s meeting? A large rate increase is a given. The markets have priced in a supersize 0.75% hike, although the ECB could opt for a less dramatic rise. Earlier this week, eurozone government yields fell sharply today on reports that the ECB was considering a 0.60% move.
The ECB has raised rates by 0.75% only once in its history, but the current economic landscape is such that there are strong arguments in support of such a massive move. Inflation in the eurozone remains red hot, with an August estimate of 9.1%. ECB members such as Isabel Schnabel have urged the central bank to come down hard on inflation, which is yet to show any signs of a peak. With the euro stumbling at 20-year lows, a 0.75% hike would likely give the currency a badly-needed boost.
The main drawback of a 0.75% move is the weak state of the eurozone economy, which has been made worse by the Ukraine war. Russian cutoffs of natural gas to Europe have become a frequent occurrence, as Moscow as proven to be an unreliable energy supplier. Germany, so often the locomotive which has pulled the eurozone back on track, is also grappling with weak growth. Eurozone and German PMIs are pointing to contraction or stagnation in manufacturing and business activity.
With a recession a very real possibility, a 0.75% would raise the likelihood of a recession. The Federal Reserve and Bank of England have made clear that taming inflation is more important than avoiding a recession, and the thinking of ECB policy makers is likely the same. If the ECB does deliver a 0.75% hike, we could see the euro respond with gains.
- EUR/USD is testing resistance at 0.9984. The next resistance line is 1.0056
- There is support at 0.9888 and 0.9816
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