Euro calm ahead of ECB meeting, Nord Stream

This week’s impressive euro rally, which has seen EUR/USD jump by about 200 points, has taken a pause today. EUR/USD is almost unchanged at 1.0224.

ECB poised for liftoff

It’s show time (finally) in Brussels, as the ECB will announce a lift-off in interest rates on Thursday. The event will be closely watched as the ECB is expected to raise rates for the first time in a decade. The markets are still uncertain as to the extent of the rate increase, with analysts split on whether the ECB will deliver a 25bp or a more substantial 50bp increase. With its deposit rate at -0.50%, the ECB is well behind the inflation curve and additional hikes are expected in the coming months. The central bank has been sounding more hawkish as inflation continues to accelerate, and the key question is whether the ECB will come out flying with a 50bp salvo or opt for a modest 25bp move.

The euro has looked good since breaching the parity line last week, but risk sentiment remains fragile when it comes to Europe. There are lingering fears about Russian gas supplies to Europe ahead of winter and the potential for a recession if gas exports are disrupted. The markets could face a test on Thursday, as the Nord Stream pipeline, which provides one-third of Russian gas exports to the EU, is scheduled to renew service after a maintenance break. If Moscow refuses to turn on the gas tap, the spectre of the EU scrambling for gas supplies could unnerve the markets and send the euro lower.

It’s certainly not business as usual in the European Commission (EC) ahead of the pipeline’s scheduled restart. On Wednesday, the Wall Street Journal quoted EU Budget Commissioner Johannes Hahn as stating that he did not expect Nord Stream 1 to restart on time. This was followed today with the EC requesting EU members to scale back gas usage by 15% by March 31, as an emergency step. Stay tuned for tomorrow’s developments.

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EUR/USD Technical

• EUR/USD tested support at 1.0197 in the European session. The next support level is 1.0075
• There is resistance at 1.0307 and 1.0429

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