EURUSD bounces off 20-year lows near 0.9950s but stays heavy, as sellers pile around parity

• EURUSD erased Wednesday’s losses, diving below parity, reaching a daily low below 0.9960.
• US PPI rose as well as consumer inflation; will the Fed go 100 bps?
• Federal Reserve interest rates expectations of a rate hike lie at around 89%.
• Interest rate differentials between the Fed and the ECB boost the EURUSD fall.

EURUSD gave up on sellers and broke below parity for the first time since December of 2002, finishing a period of 20 years above the €1/$1 figure, reaching a fresh 20-year low around 0.9952, before recovering some ground and trimming its earlier losses of 0.43%, on Thursday. At the time of writing, the EURUSD is seesawing around 1.0004.

Global equities are tumbling, displaying investors’ pessimistic mood. In the meantime, the US Dollar Index, a measurement of the greenback’s value against a basket of six of the G8 currencies, printed a fresh 20-year high, around 109.294, before retreating some, but remains up 0.67% underpinned by higher US Treasury yields, and is sitting at 108.720, a headwind for the EURUSD.

Also read: EUR/USD Forecast: Third time a charm? Parity under pressure again

US inflation remains high, as PPI exceeds estimates

US PPI report continues high

Before Wall Street opened, the US docket reported prices paid by producers, also known as PPI. The PPI continued its upward trajectory, topping the 11% mark at 11.3%, beating expectations of 10.7%. Albeit a negative reading, showing persistent cost pressures, producers get a respite as commodity prices recoil on concerns about global demand. This adds to Wednesday, Consumer’s Price Index (CPI), which at 9.1% YoY, inflicts substantial pressure on the Federal Reserve to move quickly and aggressively if they would not like inflation expectations to anchor at higher levels. Consequently, this would be a headwind for the EURUSD, despite the ECB’s guidance that it would begin raising rates for the first time in 11 years.

Fed speakers began to be vocal about rate hikes and emphasized that inflation is high

Meanwhile, EURUSD traders should be aware of additional Fed speakers piling up before entering the blackout period. On Wednesday, after the lousy inflation report in the US, Atlanta’s Fed President Raphael Bostic said everything is in play when asked about raising rates 100 bps in the July meeting. Later, the Cleveland Fed President Loretta Mester said they don’t need to decide on rates today but emphasized that inflation is “too high,” and the CPI report was uniformly negative. In the meantime, backing 75 bps is San Francisco’s Fed Mary Daly, but she also said that 100 bps is within the range of possibilities.

US 2s-10s yield curve remains inverted; a Fed 100 bps hike in July is possible

The US 2s-10-yield curve is still inverted for the eighth consecutive day, deepening into further negative territory towards -0.243%, a level last seen in 2000. However, at the time of writing, the spread reduced to -0.172%, as traders’ fears about recession easied a tone. Nevertheless, that would not deter the Federal Reserve from aggressive tightening, which is terrible news for EURUSD longs. According to money market futures STIRs, the eurodollars July’s futures contract, at 97.295, displays  270 bps of tightening, implying that the Fed could hike rates close to 100 bps in the July meeting.

Eurodollars discount a 270 bps tightening by July

ECB vs. Fed differentials, a headwind for the EURUSD

In July, both banks, the ECB and the Federal Reserve will host their monetary policy meetings. Currently, the ECB’s deposit rate lies at minus 0.50%, while the US Federal Reserve’s Federal funds rate (FFR) is at 1.75%, bolstering the appetite for the greenback. With expectations of the ECB hiking 25 bps and the Fed to move at least by 100 bps, differentials would widen further, to -0.25% (ECB) vs. 2.75% (Fed), meaning that the greenback would keep the upper hand, opening the door for further selling pressure on the EURUSD.

Also read: EURUSD Price holds parity on hawkish Fedspeak, EU Economic Forecasts eyed

EURUSD Price Technical outlook

EURUSD remains heavy, as shown by the daily chart, with the daily moving averages (DMAs) residing well above the exchange rate. Wednesday’s correction offered EURUSD shorts a better entry price after hitting a daily high around 1.0122, but on Thursday, the major extended its losses, pushing below the parity. Therefore the EURUSD path of least resistance might continue to the downside.

Therefore, the EURUSD first support would be 1.0000. A breach of the latter will expose the fresh 20-year low at 0.9952. Once cleared, EURUSD sellers’ next challenge will be December 2002 lows around 0.9859.

EURUSD Key Trading Levels