EUR/USD Parity Achieved! What’s Next?

Rate Hike Incoming. Will the ECB Finally Take Action?

Two decades ago, EUR/USD was trading at 1.0000; last week the pair visited that historic price once again, reaching a low at 0.9952. Since then, the US Dollar has retreated a bit, allowing the pair to climb to 1.0140 at the time of writing.

Inflation in the United States has reached record levels, hitting 9.1% (year over year readings), which is the highest it’s been in 40 years. This played a role in the pair’s move to parity and sparked speculation about a 100 bps hike at the FOMC’s next meeting which takes place next week. Although the probability of such a bold move is low, if it does happen, the market’s volatility will go through the roof.

But until that question gets an answer, we should focus on the European Central Bank meeting that takes place this week. The ECB is finally about to hike the main refinancing rate from 0.00% to 0.25%. The ECB is among the last central banks to hike rates and it is unclear how it will affect the Euro because the hike may be already priced in by the time of the actual decision.

Key Events for the Week Ahead

Thursday at 12:15 pm GMT, the ECB will release the Monetary Policy Statement, which contains the interest rate decision and the reasons that influenced the said decision. The rate is expected to be changed to 0.25% after being kept at 0.00% for a long time, so it’s safe to say that volatility will increase at the time of the release.

Just half an hour later, at 12:45 pm GMT, ECB President Lagarde will hold the usual press conference. She will read a prepared statement and then will answer journalists’ questions; this second part of the conference is usually the most important and the one that triggers the biggest moves on Euro pairs.

Friday we have a cluster of PMI releases, namely the German Manufacturing and Services PMIs at 7:30 am GMT, followed by the U.S. Flash Services PMI at 1:45 pm GMT. These are surveys of purchasing managers from the respective sectors and act as leading indicators of economic health. The impact is medium but should not be overlooked.

Technical Outlook – EUR/USD

The importance of the level at 1.0000 is threefold: it’s a historical landmark (last touched 20 years ago), a psychological barrier, and a technical level (the price reacted to it back in 2002). All this makes 1.0000 a good point for the pair to start a relief rally, which has already begun as shown by the chart below.

The first potential resistance is the previous support located at 1.0350 but the touch or break of this level will depend on the outcome of the ECB Meeting and the tone of the ECB President during the press conference.

The RSI and MACD are both indicating that the rally can continue (RSI coming out of oversold, MACD crossing bullish) but the fundamentals can interfere with this scenario. As always, be extra careful around the time of the ECB rate announcement and press conference.