- Since the start of this week's trading, the EUR/USD currency pair continues to bounce higher amid a temporary halt to the US dollar's record gains.
- The rebound gains yesterday were on the cusp of the parity price, as it rose to the 0.9977 resistance level and settled around the 0.9950 level at the time of writing the analysis, waiting for a new stimulus.
- As I mentioned before, waiting will continue to dominate the euro pairs until the European Central Bank's monetary policy decisions are announced tomorrow.
Expectations are for the European Central Bank to rise by 75 basis points at the October meeting. This has become a consensus in recent weeks, and the markets are fully pricing such a move. This means that - except for the surprise on the size of the rally - the market reaction will depend on the ECB's position on further price hikes.
Any adjustments to the meeting-by-meeting data-driven approach and/or references to the final price. Changes in inflation and growth expectations. And a discussion about quantitative tightening.
In the ECB Preview, we highlight what we expect to hear on these topics this week. Here you can see where we come from; It's a typical pre-meeting scenario analysis, where we look at the implications for the EUR/USD and the price market for those different potential outcomes. A 75 basis point increase would not be a game changer for the EUR/USD.
EUR/USD Forecast
Overall, we see limited upside risks for the EUR/USD in the wake of the ECB announcement. This is mainly due to the weak correlation between short-term interest rates and currency dynamics in the Eurozone. This means that the additional narrowing being priced in the euro curve on the back of the upbeat statement is still unlikely to provide significant and, above all, sustainable support for the euro.
This has already been the case in the past few meetings, as the ECB has consistently surprised by the hawkish side but that hasn't prevented the Euro from depreciating. The tightening FX protest (against the inflationary weakness of the Euro) simply does not work in the current market environment. In line with our expectations for a stronger dollar, as the Fed continues to tighten policy and keeps risk sentiment weak in the new year, we expect a drop below the 0.9500 level in the EUR/USD by the end of this quarter.
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