ECB policymakers have towed the same line used by Fed Chair Jerome Powell at Jackson Hole, outlining their continued inflation-fighting stance. The hawks have been out in force recently, backed up by surging inflation and the ongoing gas crisis and energy shock.
Of course, this comes ahead of the August inflation data due shortly, where economists are forecasting another fresh record high of 9% for the headline consumer price index to be announced later today.
Next Thursday’s ECB meeting also looms large in dictating the immediate-term performance for EUR.
Among the numerous hawkish comments, markets have notably moved up their expectations for a larger 75-basis point hike next week, with such odds placed at 67.5% at the time of writing. That’s in stark contrast to the 50bps September hike predicted at the start of this month. By year-end, markets are pricing in around 165 basis points.
The hawks are keen to move rates into restrictive territory quickly, with the preservation of credibility on the line for many officials.
Such hawkish commentary has even allowed the euro to shrug off the risk of a worsening energy crisis.
Europe is bracing for the possibility of Russia shutting off gas supplies to the continent, with the crucial Nord Stream pipeline undergoing a 3-day maintenance period beginning today. French utility company, Engie SA, has already been notified that Russian gas deliveries will cease starting tomorrow (Thursday, September 1st) over a payment dispute.
The question now for FX markets is whether the persistent negative sentiment has peaked, with sentiment too one-sided for EUR to weaken further?
The single currency has been straddling parity over the last week or so with a base potentially enfolding.
Last week saw a cycle low in EUR/USD just above 0.99 which had pierced the mid-July low at 0.99522. If prices hold this zone, last week’s high at 1.0090 is initial resistance before prices get back to the summer range from 1.01 to 1.035.