EUR/USD price forecast amid inflation reaching 10.2% in Spain

By:
on Jun 29, 2022
  • EUR/USD unable to bounce from a 7-year low
  • ECB to hike rates in July
  • Interest rate differential favors the US dollar

The last trading week of June is a special one for FX traders. First, the trading month ends on Thursday, and so the volatility is expected to increase during the main fixing times.

Second, June’s NFP or Non-Farm Payrolls data will not be released on Friday as it should have been. This is because of the upcoming 4th of July holiday. Therefore, expect the end of the trading week to be slow and market participants to focus on something else rather than on trading.

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As such, traders will focus this week on interpreting economic data and on trying to forecast the next market movements. Because of the ECB Conference at Sintra in Portugal, the euro is in focus.

Where will the EUR/USD go from here?

Earlier today, the Spanish inflation reached 10.2%, and about half of the rise was seen in core data. Therefore, the ECB is pressured to act in July and will probably opt for a 50bp rate hike instead of a 25bp.

Perhaps this is why most market participants see the EUR/USD higher from here. Take the ING’s forecast for the pair, for instance, and compare it with the market’s consensus.

ING, one of the largest banks in Europe, sees the EUR/USD exchange rate at 1.08 by the end of 2022 and at 1.15 by the end of 2023. It is much more optimistic than the market, where consensus is that the EUR/USD will settle at 1.07 by the end of 2022 and 1.11 by the end of 2023.

But EUR/USD’s price action tells something else. It is unable to bounce from a 7-year low level. Unless it does so pretty soon, the bias is that it will eventually break horizontal support.

EUR trades at a 7-year low against the USD

EUR/USD is back at a 7-year support level. After Mario Draghi started to cut the interest rate, the euro dropped from 1.40 against the US dollar to 1.05 without a meaningful bounce.

In the past 7 years, plenty of things happened on both sides of the Atlantic. Trump became President of the United States, then Macron was elected President in France, and the ECB kept the dovish bias.

Fast forward to present times, Europe fights a pandemic and the effects of outright war on its outskirts. The ECB, once again, keeps a dovish bias.

Moving forward, even if the ECB delivers a 50bp rate hike in July, the interest rate differential with the Fed will keep growing. As such, the path of least resistance for the EUR/USD exchange rate should be towards parity and not towards the market consensus.

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