EURUSD set to pop as headwinds ease

Last week the ECB hiked rates by 75bp, taking the deposit rate to 0.75%.

The comments that accompanied the decision noted that policy rates remain “far below” levels needed to ensure the return of inflation to 2% and that further hikes “over the next several meetings” will be required.

With an eye on European inflation, expected to hit 10% shortly, the European interest rate market is now gravitating towards a 75bp rate hike at the October meeting (64bp priced). The expectations are then for a 50 bp hike in December and two smaller 25bp rate hikes in 2023, taking the terminal rate to 2.5% in Q1 2023.

The repricing of the European rates market has coincided with the Ukrainian Armed Forces reclaiming a substantial amount of territory over the weekend.

As well as a sharp fall in natural gas prices on proposed government measures of a windfall tax. Dutch natural gas futures are trading at €195/MWh after hitting €340/MWh just under three weeks ago.

Turning to the U.S side of the equation, the US interest rate market currently has 72bp of a 75bp rate hike priced for the upcoming Sep FOMC. Followed by a 50bp and a 25bp rate rise that would take the Fed Funds rate to 3.75%-4% by year-end.

The Fed looks set to take its foot off the rate hiking cycle gas when the ECB is just pressing down on the pedal.

Combined with recent developments on the battlefield, the energy market, many factors that have driven the EURUSD are now easing.

Throw into the equation the market is holding a modest EURUSD short position, and the stage is set for a EURUSD recovery.

Consider buying EURUSD at 1.0150 with a trailing stop loss placed initially at .9850. The target is a move to the 200-day moving average at 1.0750/00.

Source Tradingview. The figures stated are as of September 12th, 2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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