Euro dips as 0.75% ECB hike in question

EUR/USD slipped to a new 20-year low earlier today, falling to 0.9864. Currently, the euro is trading at 0.9910, down 0.20%.

Is ECB backtracking on a super-size hike?

Eurozone government yields fell sharply today on reports that the ECB may decide to scale down an expected 75 basis point hike on Thursday. This has pushed the euro to a new 20-year low earlier today, as the currency remains under pressure.

There have been broad expectations that the ECB, which has been lagging behind most central banks in tightening policy, would deliver a 0.75% rate hike, but apparently, ECB policy makers may be looking at scaling the hike to just 0.60%. The markets are currently pricing in a 67% chance of a 75bp move, sharply lower than the almost 90% likelihood earlier today. We could see the pricing continue to fluctuate as we get closer to the meeting, with investors looking for clues as to how high the ECB will hike.

High inflation isn’t going anywhere, and the ECB will need to drastically tighten if interest rates are to curb inflation. At the same time, the eurozone economy is weak, and the German locomotive has also slowed down. If the ECB raises rates too aggressively, the economy could tip into a recession.

Germany Factory Orders for July, released today, served as a grim reminder that the manufacturing sector remains in trouble. The reading of -13.6% YoY follows a decline of 9.0% in June (-6.0% est). In the eurozone, economic releases are sounding the alarm. PMIs are indicating contraction in manufacturing and business activity, retail sales are down and investor confidence remains mired deep in negative territory. With no indication that things will improve anytime soon, the euro could continue to lose ground.

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EUR/USD Technical

• EUR/USD is testing resistance at 0.9984. The next resistance line is 1.0056
• There is support at 0.9888 and 0.9816

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