Euro Shoots Higher as US Dollar Drops Ahead of ECB Rate Decision. Where to for EUR/USD?

Euro, EUR/USD, US Dollar, ECB, Fed, FOMC, BoC, Treasuries, LNG – Talking Points

• Euro is gassed up against a US Dollar that has been hit by pivot perceptions
• The ECB is anticipated to hike later today, as other central banks are in the frame
• If the northern winter is a mild one, will EUR/USD keep moving to higher ground?

Euro hit the after burners last night as it climbed to a seven-week high toward 1.0100.

EUR/USD has been ratcheted higher on a weaker US Dollar across the board as the market looks toward a less hawkish Federal Reserve.

The Bank of Canada (BoC) raised their overnight lending rate by 50 basis points (bps), less than the 75 bp anticipated. This comes on top of the Reserve Bank of Australia (RBA) lifting their cash rate target by 25 bps instead of 50 bps forecast earlier this month.

The move by the BoC appears to have led the market to think that the Fed could be looking for a pause in their aggressive rate rise stance toward stamping out ‘eye watering’ inflation.

In these circumstances, the ‘big dollar’ has been undermined by Treasury yields slipping lower all along the curve. The 10-year note dipped below 4.0% overnight, reversing the recent climb. It peaked at 4.335% last week.

Despite the perceived ‘pivot’, futures markets and economists’ forecasts have a 75 bp gain for the Fed’s target rate penned in for next Wednesday.

The European Central Bank will be meeting later today to decide on their target rate. The market has priced in a 75 basis point (bp) hike and a Bloomberg survey of economists concurs with that outlook.

The impending northern winter presents significant risks for the European continent with energy sources under enormous strain. A positive development has been the relatively mild autumn weather conditions so far.

This has led to the build-up liquefied natural gas (LNG) being ahead of target as inventory levels near capacity. An issue has arisen whereby the storage of LNG is becoming increasingly difficult.

Unlike many other commodities, LNG has very specific requirements to be stored safely and the infrastructure is costly and has a long construction lead time. In any case, the problems around energy supply are not resolved.

If the energy situation, or the Fed re-iterate their hawkish stance, were to change, EUR/USD could see more volatility.

EUR/USD TECHNICAL ANALYSIS

EUR/USD has broken the topside of a descending trend channel and has recently crossed above the 55-day simple moving average (SMA).

At the same time, it has moved outside the upper band of the 21-day simple moving average (SMA) based Bollinger Band. A close back inside the band could indicate a pause in bullish momentum or a potential reversal.

Resistance might be at the break point of 1.0090 that currently coincides with the 100-day SMA. Further up, the September peak at 1.0198 may offer resistance ahead of a cluster of break points and a previous high in the 1.0340 – 1.0370 area.

Support could be at the break point at parity (1.0000) or the prior lows of 0.9705, 0.9632 and 0.9536.

Chart created in TradingView

— Written by Daniel McCarthy, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter