Euro Climbs to 3-Week High

The euro is red hot, having gained close to 2% in just two days. EUR/USD is trading at 1.0144, up 0.97% on the day.

ECB gives euro boost

The ECB showed last week that its hawkishness was not limited to words, as the central bank delivered a massive 0.75% rate hike, for only the second time in its history. The markets are paying attention, and the move has triggered an impressive rally by the euro. The ECB sent a powerful message that it is committed to curbing inflation by raising rates, even at the risk of a recession. President Christine Lagarde said at the meeting that she expected three or four more hikes, and the markets have priced in 0.50% increases at the October and December meetings.

The economic outlook in the eurozone remains grim, with PMIs pointing to weakness in manufacturing and business activity. Russia has shut down the Nord Stream 1 pipeline which supplies gas to Germany, raising fears that the eurozone countries could face an energy shortage this winter. It should not come as a surprise that confidence levels are weak. The ZEW Economic Sentiment index remains mired in a deep freeze, and slowed to -60.0 in July, down from -55.5 in September.

Has US inflation peaked? We’ll get a look at US CPI for August, with the markets expecting inflation to fall to 8.1%, down from 8.5% in July. Following the unexpected drop in July’s inflation release, market exuberance that the Fed would make a U-turn on its aggressive tightening sent the equity markets up and the US dollar sharply. The Fed has remained consistent with its stance and the markets appear to have internalized that the tightening cycle has some more room to run. The markets have priced in a 75 basis point hike at the meeting on September 21^st. Tuesday’s inflation report will be doubly important, as it marks the final economic release before tomorrow’s meeting. If inflation hits 8.1% or higher, it would likely cement a 75bp move by the Federal Reserve.

EUR/USD Technical

• EUR/USD has support at 1.0107 and 1.0008
• There is resistance at 1.0152 and 1.0257