While most Europeans are preparing for the annual August holidays, market watchers have their eye on July 21, says Justin Grossbard of Compare Forex Brokers.
With the EUR/USD at parity for the first time in 20 years, largely due to fears about the near-term financial health of the eurozone and aggressive efforts by the US Federal Reserve to slow inflation, analysts around the world wait with bated breath for the end of July.
EUR/USD Market Analysis
In addition to the European Central Bank’s (ECB) rate announcement, July 21 marks the final day of the scheduled maintenance period for Nord Stream One, the natural gas pipeline linking Russia with Germany, Austria, Italy, and the Czech Republic. Concern that interest rate hikes designed to limit inflation might trigger a default, as well as the looming threat of a permanent gas cutoff to the EU’s largest economy, continue to drive down the value of the Euro, while the dollar continues to surge on the back of interest rate increases.
All signs from the ECB suggest that next week’s announcement will include a 25 basis point increase, however, some within the governing council—notably, the Netherlands’ Klaas Knot and Slovakia’s Peter Kasimir—haven’t ruled out a 50 bps hike. Such a drastic rise, combined with significant upward trends in EU inflation data prior to July 21, might bolster the Euro. Likewise, consumer sentiment that markets might have lost faith in the anticipated further rate hikes by the Fed currently propping up the dollar.
Despite recent price action holding above the 1.000 parity threshold, downward drift seems likely. While this creates an opportunity to enter the trend on the negative side, strong risk management is needed to protect against the possibility of a break in the range. Even if the Euro were to drop below parity, it remains a fair distance from the currency’s zone of support.
Another side effect of parity? Extreme repositioning in favor of long positions as traders attempt to call the bottom in EUR/USD. Such an imbalance against the clear market trend can lead to difficulties if reversals come later or slower than expected or the market exceeds expectations. Proceed with caution before adjusting short and long positions.
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