Is EUR/USD heading back to parity?

The eurodollar fell more than 0.5% on Monday, approaching the 1.02 level as sentiment significantly deteriorated over the weekend.

Rising inflation levels and interest rates

Recent data indicate that at the end of September, the annual measure of inflation for the Eurozone jumped from 9.9% to 10.6%. The president of the European Central Bank, Christine Lagarde, said on Friday that interest rates will need to be increased to levels that restrain economic growth in order to control inflation at those uncomfortably high levels.

Moreover, Joachim Nagel, the president of the German central bank and a policymaker for the European Central Bank (ECB), stated on Friday that the ECB policy rate is still in an expansionary zone and has to be moved into restrictive territory, according to Reuters.

“We must resolutely raise our key rates further and adopt a restrictive stance,” Nagel said. “We cannot stop here. Further decisive steps are necessary.”

As a result, the ECB will probably boost interest rates once again in December, making it four increases in a row. Since July, the ECB has raised interest rates by 200 basis points.

COVID-19 problems in China

In multiple Chinese cities, a record rise in new COVID-19 cases was observed. In addition, further lockdowns were enacted in important financial hubs including the capital Beijing and the industrial hub Shanghai due to rising infection rates. The country's economy, which had just just recovered in the third quarter, was widely feared to once again stall as a result of the new measures.

According to data released this week, the second-largest economy in the world was already having problems in October, indicating more difficulties in the upcoming months as anti-COVID activities ramp up.

Testing important levels

Technically, the 200-day moving average was tested by the EUR/USD over the past week, but bears have so far held that level. Therefore, the immediate view appears bearish as long as the euro trades below the 200 MA (now near 1.04) and the significant resistance of 1.0350.

The 1.01 level may be a target for bears in the coming hours or days. On the other hand, if mood rises once more and the euro breaks through the indicated resistances, a rapid rally toward the highs of last week near 1.05 could occur. Daily closes over 1.04 for the euro might be a strong bullish indicator.