Euro Soars: Buoyed by Ukrainian Advance and the Mention of QT from the ECB

EUR/USD News and Analysis

• Euro surges on Ukrainian advance and a more hawkish ECB follow-up

• EUR/USD rises 1.4%, eyes key resistance but fundamentals continue to weigh on the currency

• BTP-Bund spread seen steadily rising ahead of Italian elections. Plenty ECB speakers to go around this week

Euro Surges on Ukrainian Advance and a More Hawkish ECB Follow-up

The euro mustered up a sizeable 1.4% this morning as news filtered through of Ukrainian resistance in the east of the country as Ukrainian forces went on the counter offensive.

Returning our focus to the ECB, there was a clear dissatisfaction amongst ECB governing counsel members after the sizeable 75 basis point hike was fully expected by markets and had little to no effect on markets. Soon after President Lagarde‘s speech, the famous ECB ’sources mentioned that rate hikes could top 2% (restrictive territory) to combat inflation and somewhat of an admission that the 2023 growth forecast was on the “rosey” side. Lastly, reports emerged citing that QT is on the cards as talks are to get underway in October with a potential announcement to be revealed at the October ECB meeting.

Today we see the ECBs De Guindos and Schnabel kick off a week of ECB speakers. The rest of the week is as follows:

• Tuesday: ECBs Enria and McCaul,

• Wednesday Lane, McCaul, Villeroy and EUs Von der Leyen.

• Thursday: De Guindos, McCaul, Centeno.

• Friday: ECBs Rehn

EUR/USD Technical Analysis

The EUR/USD pair started the week with a sizeable move higher, picking up where it left off last week. The disappointment showed by markets after the ECB rate hike saw EUR/USD drop towards 0.9900 where price action turned around. The EUR/USD lift is mostly attributed to a softer dollar as the runaway USD has taken a breather. However, it is likely that the USD picks up in the lead up to next weeks Fed meeting where markets price in a 90% probability of another 75 basis point hike.

Resistance shows up at 1.0180 as the nearest challenge to a bullish reversal, with the zone of resistance at 1.028 the next significant level. Support appears at 1.0100 before parity and finally the 0.9900 level once again.

EUR/USD Daily Chart

Source: TradingView, prepared by Richard Snow

However, euro fundamentals continue to grapple with the energy crisis and expect more news on the EU‘s emergency energy meeting to make its way to the fore this week. Draft proposals are to be more formally presented this week by the EU’s executive arm.

The combination of aggressive rate hikes - as we are being led to believe from recent ECB commentary and ‘sources’ – and Italian elections in two weeks‘ time, could see BTP-Bund yields ramp up to recent highs. Containing yields within the EU’s periphery states remains an integral objective of the ECB as it facilitates the effective transmission of monetary policy across the Union.