EUR/USD stages a goodish recovery on Wednesday amid a sharp USD pullback from a 20-year top. Retreating US bond yields and a recovery in the risk sentiment undermined the safe-haven buck. Bulls struggle to capitalize on the move as the focus remains on the ECB meeting and Powell’s speech. The EUR/USD pair witnessed a short-covering bounce on Wednesday and rallied around 135 pips from the vicinity of its lowest level since October 2002. The strong intraday move up lifted spot prices back above the parity mark and was sponsored by a sharp US dollar pullback. Following the recent strong run-up to a 20-year peak, the USD bulls opted to take some profits off the table amid retreating US Treasury bond yields. Apart from this, a late recovery in the US equity markets further undermined the safe-haven greenback. The shared currency further drew support from mostly better-than-anticipated economic releases from the Eurozone. According to the official data released earlier this Wednesday, German Industrial Production fell by 0.3% in July against the 0.4% decline expected. Furthermore, the Eurozone GDP was revised higher to show a growth of 0.8% during the second quarter of 2022 vs. 0.6% estimated previously. Adding to this, Russian President Vladimir Putin said on Wednesday that Nord Stream 1 is practically shut down and added that we can launch Nord Stream 2 gas pipeline if necessary. This helped ease concerns about an extreme energy crisis in Europe. Furthermore, some cross-driven strength from a sharp move up in the EUR/GBP cross offered additional support to the euro. The overnight positive move could further be attributed to some repositioning trade ahead of the key central bank event risk, though lacked any follow-through. The EUR/USD pair now seems to have entered a consolidation phase and oscillated in a narrow trading band around the parity mark through the Asian session on Thursday. Investors seem reluctant and prefer to wait for the highly-anticipated European Central Bank (ECB) meeting. The ECB is widely expected to lift interest rates for the second time in as many meetings to curb stubbornly high inflation. Investors, however, remain divided over the size of the hike amid the worsening economic outlook. The market pricing, meanwhile, indicates a greater chance of a supersized 75 bps increment amid a record high annualized inflation of 9.1% for the Eurozone in August. This increases the risk of disappointment in case the ECB decides to opt for a gradual approach toward raising interest rates. Apart from the decision, the focus will be on the post-meeting press conference, where comments by ECB President Christine Lagarde should infuse some volatility around the euro crosses. Traders on Thursday will also take cues from Fed Chair Jerome Powell's speech, which should influence the USD price dynamics and provide some meaningful impetus to the EUR/USD pair. Technical Outlook From a technical perspective, the overnight breakout through an ascending trend-line resistance might have already set the stage for additional gains. Any further move up, however, is likely to confront a barrier near the 1.0050 area ahead of the 1.0080-1.0090 supply zone. Some follow-through buying beyond the 1.0100 mark will suggest that the EUR/USD pair has formed a near-term bottom and pave the way for some meaningful recovery. Spot prices might then climb to the next relevant hurdle near the 1.0165 region before aiming to reclaim the 1.0200 round figure. The momentum could further get extended, though runs the risk of faltering near the 1.0265-1.0275 resistance. On the flip side, the descending trend-line resistance breakpoint, around the 0.9960-0.9955 region, now seems to protect the immediate downside ahead of the 0.9935 area and the 0.9900 mark. This is followed by a two-decade low, around the 0.9865 zone, which if broken decisively will be seen as a fresh trigger for bearish traders. The EUR/USD pair might then turn vulnerable to slide further towards the 0.9800 round figure. Some follow-through selling below the 0.9770 region has the potential to drag spot prices further towards the 0.9700 mark en route to the 0.9620-0.9610 zone, or the August/September 2002 lows.

The ECB is expected to hike rates by 50 bps in its September meeting. Markets are wagering a 75 bps rate hike amid surging energy costs. The bank’s staff projections are in focus, with no respite seen for the EUR. After raising interest rates for the first time in over a decade in July, the European Central Bank (ECB) is set for another rate increase this Thursday, although the big question is whether the central bank will opt for 50 basis points (bps) or 75 bps hike amid record-high inflation and recession risks. The ECB will announce the interest rate decision at 1215 GMT, which will be followed by President Christine Lagarde’s press conference at 1245 GMT. The ECB remains in a tough spot The ECB finds itself in a tough spot in the last leg of the European summer. The old continent sees desperate times, in the face of rising inflation and an imminent recession. The central bank maintains its resolve to prioritize the taming of inflation even if it could mean some pain for the economy, and, therefore, is set to hike its three key interest rates by another 50 bps at this month’s monetary policy meeting. Following the Fed’s Jackson Hole Symposium and a record high annualized inflation of 9.1% for the Eurozone last month, markets priced in an 80% probability of a 75 bps increment in September. Top ECB policymakers also joined the Fed’s chorus of going in for an outsized rate hike to control raging inflation. Over the past week, however, the Russian giant Gazprom’s gas cut-off to Europe from its Nord Stream 1 pipeline has complicated the situation for the ECB. Gas prices have soared 255% in 2022 and on Monday jumped roughly 30% following the Nord Stream 1 shutdown news. The euro area is bearing the brunt of a protracted Russia-Ukraine war and the Western sanctions against Moscow. The German economy is the worst affected, with a recession imminent. Source: Reuters Amidst the deepening European gas crisis and mounting recession fears, the euro has tumbled to fresh two-decade lows below 0.9900 against the US dollar, down 13% so far this year. The rapid depreciation of the shared currency is amplifying the effects of soaring energy costs, accentuating concerns over already record-high inflation. Against this backdrop, markets remain in favor of an outsized rate hike, as bringing down inflation is likely to be of utmost priority even though controlling energy costs is out of the purview of the central bank. Markets are now wagering around a 68 bps rate hike on Thursday, given that the peripheral yields have surged this week after euro area economies issued a huge amount of bonds this week. But earlier this week, during the so-called ‘blackout period’ for the ECB, a bunch of the central bank policymakers talked up the ‘slow normalization’ process. Governing Council member Mario Centeno said that “the ECB may achieve inflation goal with slow normalization.” His colleague, Martins Kazaks, said a broad and protracted recession could slow rate hikes. Meanwhile,  fellow policymaker Yannis Stournaras noted that “Eurozone inflation is close to its peak,” hinting at a slow down in the bank’s tightening path. The ECB commentary could be seen as a deliberate attempt to temper the aggressive ECB tightening expectations. The officials spoke just a couple of days ahead of the policy announcement, implying a 50 bps hike. Investors will also closely examine the staff projections, as the ECB said that it remains data-dependent on its future rate hike outlook. The central bank’s forecast on the growth and inflation outlook will have a significant impact on the common currency. Trading EURUSD price with the ECB EUR traders are bracing for high volatility and big market impact from the upcoming ECB policy announcements, with EUR/USD meandering near 20-year troughs on the 0.9800 level. A 75 bps rate hike by the ECB could come as a surprise and offer a temporary respite to EUR/USD, as such a move is not fully priced in yet. The pair could recover the parity mark on a super-sized rate increase. Although the renewed upside in the euro is likely to remain short-lived amid the dire Eurozone economic outlook. However, if the ECB projects a recession in early 2023, then it could take the wind out of the EUR/USD recovery, smashing the price back towards the two-decade lows. The previous forecasts showed that the bank expected a 2.1% growth for this year but is likely to be revised downward this time. Meanwhile, a 50 bps rate hike could question the central bank’s commitment to fighting inflation. It could also highlight the ECB’s concerns about the risks of a deep recession. In such a case, the pair could extend the downtrend towards 0.9700, as it would widen the Fed-ECB monetary policy divergence. At...

Recent economic data paint a picture of increasing concerns about the economic outlook. In the US, high inflation and rising interest rates play a key role. In the euro area, the same factors play a role – although interest rates are still below those in the US – but skyrocketing energy prices and gas supply disruption are additional forces that should drag down growth. Easing price pressures in business surveys are a hopeful development but selling price expectations remain nevertheless exceptionally high given the weakening of order books. This could point to input price pressures that force businesses to charge higher prices to protect their margins. It is to be feared that slowing demand will make this increasingly difficult, forcing companies to cut back on investments and new hirings. The summer break is supposed to be a period of disconnecting from the economic and geopolitical news flow. The focus shifts to relaxing, food, enjoying the weather, etc. The focus of attention flips once the holidays are over. This year is no exception, rather to the contrary. The extreme conditions in many countries during the summer months – high temperatures, drought in some countries and flooding in others, forest fires – have reminded us that the impact of climate change has become all too visible and that it entails a huge cost, not only in terms of human suffering but also for the economy. Looking at the economic data, the picture that emerges is one of increasing concerns about the economic outlook. Although thus far it has been gradual, this development is likely to accelerate. Concerning the gradualism, high activity levels and well-filled order books still provide some resilience to the rising headwinds. In the US, according to the nowcast of the Federal Reserve Bank of Atlanta, recent data correspond to a healthy increase of real GDP (chart 1). Job creation remains strong, and the Conference Board’s consumer confidence index has rebounded in August. However, signs of slowdown are growing. Households suffer from high inflation, giving rise to a big increase in credit card balances1. Activity in the housing sector is suffering from the rise in mortgage rates, the pace of hiring is slowing, and new vacancies are down. The surveys of the regional Federal Reserve banks points toward a more cautious stance of companies in terms of capital expenditures. This is unsurprising considering that 81% of CEOs contacted by the Conference Board expect a brief, shallow recession in the US over the next 12 to 18 months2. Domestic demand growth will slow down further under the influence of Federal Reserve rate hikes, whereas net exports should suffer from the strong dollar and the slowdown in the rest of the world. Chinese growth, after a slow rebound since late spring, has disappointed again in July and downside risks remain high. In the euro area, like in the US, a distinction should be made between the activity level and its change. In manufacturing, the duration of production that is assured by current order books remains at a record high level (chart 2) but the assessment of orders books has seen two large drops in a row. Employment expectations have also declined in recent months but remain in the upper end of the historical range (chart 3). Based on the shocks hitting the euro area economy – high inflation, the jump in gas and electricity prices, the weakening of the euro, rising interest rates, the shutoff of Russian gas supply – business sentiment is expected to weaken further, which should weigh on the hiring intentions and investment projects of companies. As has been the case historically, this should be followed rapidly by rising unemployment expectations of households. Thus far, elevated inflation has been the key factor behind the drop in consumer confidence to historically low levels. Fears about job losses would make matters worse for consumer spending. A decline in inflation would bring some relief for households’ purchasing power, but the latest energy price shocks should delay the peak in inflation and slow down its subsequent decline. Easing price pressures in business surveys are a hopeful development. As shown in chart 4, the assessment of order books has declined and so have the selling price expectations. However, the latter remain exceptionally high given the situation with respect to the former. This could reflect input price pressures that force businesses to charge higher prices to protect their margins. It is to be feared that slowing demand will make this increasingly difficult, forcing companies to cut back on investments and new hirings. Download The Full Eco Flash

Liz Truss’ pledge to freeze energy costs brings optimism on her first day, while the Nasdaq underperforms despite stronger service PMI data. Liz Truss energy plans bring hope that inflation can be brought under control “The pound has outperformed many of its peers today, with Liz Truss delivering a much-anticipated shock and awe announcement aimed at bringing energy prices under control. In a week that is dominated by central bank announcements from the RBA, BoC, and ECB, it should be noted that monetary policy’s ability to bring inflation under control in the face of weakening currencies and soaring energy prices is somewhat limited. The decision to freeze UK energy prices ahead of next month’s widely anticipated spike will arguably provide a greater impact on inflation expectations than a 75bp hike in interest rates. The dramatic Covid spending package enacted under Rishi Sunak looks to be just the beginning, with this package costing up to £130 billion over the coming 18 months. For the near-term this seems and effective way to bring greater certainty and relieve the pressure on the Bank of England, but the long-term consequence will undoubtedly result in another pile of debt that will ultimately need paying through higher taxes.” US services jobs remain strong as PMI highlights continued growth “A belated start to the week for US markets has brought fresh losses at the open, with growth names driving underperformance for the Nasdaq. Today’s ISM services PMI reading brought plenty of grounds for optimism, with a surprise rise accompanied by a declining price growth, rising employment growth, and particular strength for new orders. With 83% of Friday’s 315k payrolls reading coming from the private services sector (263k), there is no doubt that rising prices are yet to stifle employment in the critical segment of the economy. ”

EUR/USD hits a fresh two-decade low and is pressured by a combination of factors. Russian gas cut stokes recession fears and weighs heavily on the shared currency. Hawkish Fed expectations continue to underpin the USD and contribute to the fall. The EUR/USD pair opens with a modest bearish gap on the first day of a new week and drops to its lowest level since December 2002, below the 0.9900 mark during the Asian session. Russia's indefinite closure of its main gas supply pipeline stokes fears over a worsening energy crisis in Europe and weighs on the shared currency. Hours after the Group of Seven leaders agreed to implement a price cap on Russian oil, Gazprom cancelled the resumption of gas flows through the Nord Stream 1 pipeline citing an oil leak in a turbine. This, in turn, fuels worries about a potential economic recession in the Eurozone, which, along with a stronger US dollar, exerts downward pressure on the major. The USD Index, which measures the greenback's performance against a basket of currencies, rose to its highest level since late 2002 and remains well supported by hawkish Fed expectations. Despite Friday's mixed US monthly jobs report, investors seem convinced that the US central bank will stick to its aggressive policy tightening path. The headline NFP showed that the US economy added 312K jobs in August, better than the 300K anticipated. This, however, marked a notable slowdown from the previous month's downwardly revised reading of 526K. Moreover, the US unemployment rate unexpectedly rose to 3.7% from 3.5% in July and Average Earnings growth slowed to 0.3% from 0.5% in the previous month. Nevertheless, the markets are still pricing a greater chance of a supersized 75 bps rate hike at the September FOMC meeting. This, in turn, remains supportive of elevated US Treasury bond yields and continues to act as a tailwind for the greenback. The fundamental backdrop supports prospects for extending the recent bearish trend, though a combination of factors might help limit losses for the EUR/USD pair. Relatively lighter trading volumes on the back of the US Labour Day holiday should keep traders from placing aggressive bearish bets. Furthermore, calls for an unprecedented jumbo 75 bps interest rate hike by the European Central Bank could lend some support to the common currency. Hence, investors might prefer to move on the sidelines ahead of the key central bank event risk - the ECB policy decision on Thursday. Nevertheless, the path of least resistance for the major is to the downside and any attempted recovery would still be seen as a selling opportunity. Technical Outlook From a technical perspective, the EUR/USD pair is flirting with descending trend-line support extending from mid-July. A convincing break below will be seen as a fresh trigger for bearish traders and pave the way for additional losses. Spot prices might then accelerate the fall towards the next relevant support near the 0.9850-0.9845 zone before eventually dropping to the 0.9800 round figure. On the flip side, the 0.9930-0.9935 region now seems to be an immediate hurdle. Any further move up runs the risk of fizzling out rather quickly near the parity mark. That said, sustained strength beyond might trigger a short-covering bounce towards the 1.0050-1.0055 supply zone, above which the EUR/USD pair could reclaim the 1.0100 mark. Some follow-through buying will suggest that spot prices have bottomed out and set the stage for a move towards the 1.0150-1.0155 intermediate hurdle en route to the 1.0200 round figure and the 1.0260-1.0270 resistance.

Investors appear relatively pleased with the jobs report despite some initial choppy trade following the release. The headline NFP figure was a little larger than expected at 315,000 which may have created that initial unease as a knockout report could have effectively paved the way for a 75 basis point rate hike this month. But once you dig a little deeper, there are aspects of the report that will please the Fed and support the case for easing off the brake. While we can't put too much weight on one report, a surprise spike in participation from 62.1% to 62.4% will undoubtedly be welcomed, lifting unemployment to 3.7% from 3.5% along with it. As will hourly earnings rising by 5.2% against expectations of a small increase to 5.3%. All of this will be a relief to policymakers but I'm not sure it will be enough to change their minds at this point. There's been such an effort to put 75 basis points on the table in recent weeks, to change their mind on the back of this would seriously undermine their guidance in future. If paired with another decent drop in inflation in a couple of weeks, more may be convinced. We're seeing some relief in equity markets after what has been a pretty dire week until now. US futures have added half a percent since the release while the dollar and US yields are slightly lower, albeit after some very choppy trade initially. Gold is breathing a huge sigh of relief, up around 0.75% on the day, with $1,680 support potentially safe for now. This is a really significant area of support for the yellow metal and while it didn't get too close on this occasion, a move below could see gold trading at two-year lows which could be a major blow. Bitcoin is another instrument that is displaying some relief having spent the week desperately defending $20,000 support. The report isn't enough in itself to overly excite traders, not even the crypto crowd I would have thought, but it could reinforce that support which is important. A break of $20,000 could be painful for bitcoin and today's data may enable it to hold above here for a while longer yet.