- EUR/USD has recovered to the 1.0450 area on Tuesday after briefly dipping under 1.0400 and eyeing annual lows on Monday.
- Hawkish ECB speak might be helping for now, but most traders will refrain from placing big bets pre-Fed.
- The potential for further risk-off flows means the pair remains at risk of hitting fresh annual lows.
After dipping briefly below 1.0400 on Monday and eyeing a test of previous annual lows in the 1.0350 region as the broader Dollar Index (DXY) hit fresh multi-year highs, EUR/USD has mounted a reasonable recovery on Tuesday. The pair was last trading in the 1.0450 region, higher by about 0.4% on the day, despite slightly softer than expected German ZEW Economic Sentiment survey data for June released during the European morning.
The euro seems to be benefitting from hawkish ECB speak, with Dutch central bank head and ECB governing council member Klaas Knot having earlier hinted at the prospect of a larger than 25 bps rate hike from the ECB next month “if conditions remain the same as today”. Indeed, with markets having moved to swiftly price in an additional 25 bps of tightening from the Fed at this Wednesday since last Friday’s hot US inflation figures, there is no reason they won’t move to price a 50 bps hike from the ECB next month.
In terms of calendar events for the remainder of the day, US Producer Price Inflation (PPI) data at 1230GMT will be worth watching in the context of ongoing concerns about persistently high inflation. Meanwhile, a speech from influential ECB policymaker Isabel Schnabel at 1700GMT on the topic of Eurozone fragmentation will be interesting in the context of the recent rise in the German-Italian yield spread (which surpasses 250 bps on Monday).
Ahead of key macro events later this week, traders would be wise not to chase any big moves in either direction. The prospect of renewed downside in risk assets on central bank tightening fears, which tends to weigh on EUR/USD (because the buck is seen as a safe-haven currency) could yet send the pair to fresh annual lows under 1.0350.
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