Week Ahead: Euro to climb on more aggressive ECB rate hike bets?

Last week, we cited the possibility of the US dollar falling as recession fears mount.

At the time of writing, the benchmark dollar index (DXY) is set for a weekly decline, ending a run of three consecutive weekly gains. The softer greenback has in turn allowed EURUSD to resurface back above 1.05.

The bloc’s currency will be in focus going into the second half of 2022, amid these scheduled data releases and events in the coming week:

Monday, June 27

• CNH: China May industrial profits
• US crude: EIA weekly US crude inventories (delayed from last Thursday)

Tuesday, June 28

• GBP: BOE Deputy Governor Jonathan Cunliffe speech
• USD: San Francisco Fed President Mary Daly speech; US June consumer confidence

Wednesday, June 29

• JPY: Japan May retail sales, June consumer confidence
• AUD: Australia May retail sales
• ECB panel featuring ECB President Christine Lagarde, Fed Chair Jerome Powell, and BOE Governor Andrew Bailey
• EUR: Eurozone economic confidence; Germany June inflation
• USD: US 1Q GDP (third print); speeches by Cleveland Fed President Loretta Mester and St. Louis Fed President James Bullard
• US crude: EIA weekly US crude inventories

Thursday, June 30

• JPY: Japan May industrial production
• NZD: New Zealand June business confidence
• CNH: China June PMIs
• GBP: UK 1Q GDP (final print)
• EUR: Eurozone May unemployment
• Brent: OPEC+ meeting
• USD: US weekly initial jobless claims, May personal income/spending, May PCE deflator

Friday, July 1

• NZD: New Zealand June consumer confidence
• AUD: Australia June manufacturing PMI
• JPY: Japan June Tokyo CPI, May jobless rate
• CNH: China June Caixin manufacturing PMI
• EUR: Eurozone June CPI and manufacturing PMI
• USD: US June ISM manufacturing, June S&P Global manufacturing PMI

 

The Eurozone’s incoming unemployment and inflation data are set to be interpreted within the context of the European Central Bank’s plans to raise interest rates.

As things stand, the ECB has already well-telegraphed to the markets its intentions for a 25-basis point rate hike in July. The ECB could then trigger a larger 50bps hike at its following meeting in September.

Those two hikes alone should bring the curtains down on the ECB’s negative interest rates regime, with markets expecting 200 basis points in hikes between now and March 2023.

However, the ECB may be forced to front-load its rate hikes, just like the Fed is doing, if the Eurozone’s inflation print comes in much hotter than expected.

The median estimate for the June CPI print is 8.3%, which would be a fresh record high for the Eurozone, and also higher than May’s 8.1% year-on-year print.

And if its unemployment rate continues to show resilience, with markets expecting the May print to be 10 basis points lower than April’s 6.8% print, that could even pave the way for ECB officials to become even more aggressive in its battle against record-high inflation!

 

EURUSD eyes 50-day SMA resistance and 1.035 support

If this narrative holds and markets ramp up their bets for a more aggressive ECB, that could help EURUSD retest its 50-day moving average as the immediate resistance level, currently hovering around the 1.06 mark.

Otherwise, a lower EURUSD could bring the 1.035 support region back into focus, having offered the world’s most popular currency pair two chances to rebound since May.

 

Overall, EURUSD is expected to continue being guided lower by its 50-day SMA, as has been the case over the past 12 months.

The euro’s upside remains capped by two major themes:

• Recession risks are still clouding the Eurozone’s economic outlook, noting that the Russia-Ukraine war is still raging off the bloc’s eastern borders.
   
• Fragmentation risks also weigh heavily on the euro, and the ECB’s new anti-crisis policy tool must be able to convince the markets of its effectiveness. Otherwise, the yields disparity could run out of control and trigger unruly declines in EURUSD.

 

Of course, the US dollar will have a major say on EURUSD’s performance. If the prospects of a US recession loom larger, that could translate into more moderation for the buck and more relief for the euro.

And with ECB President Christine Lagarde potentially offering more policy signals side-by-side with Fed Chair Jerome Powell mid-week, that could offer fresh catalysts for the EURUSD as we head into July.

Still, the ECB has to deliver on the market’s hawkish rate hike bets while keeping the region’s fragmentation risks at bay, in order to sustain hopes of a recovery for the euro.

 

Week Ahead EURUSD ECB European Central Bank inflation rate hike unemployment fragmentation risks US Dollar Federal Reserve