EUR/USD Forex Technical Analysis – ECB has to Supersize Rate Hike or Risk Inflation-Fighting Credibility

The Euro is trading mixed against the U.S. Dollar on Thursday, shortly before the release of the European Central Bank’s (ECB) interest rate decision at 12:15 GMT and President Christine Lagarde’s press conference at 12:45 GMT.

The ECB is widely expected to raise its benchmark interest rate by 75-basis-points (bps) to fight runaway inflation, although Europe’s energy crisis has kept the Euro under pressure. On Tuesday, the single-currency hit a 20-year low of .9864 against the greenback.

At 10:28 GMT, the EUR/USD is at 1.0014, up 0.0008 or +0.07%. On Wednesday, the Invesco CurrencyShares Euro Trust ETF (FXE) settled at $92.44, up $1.00 or +1.09%.

Fed Chair Powell Follows ECB Announcements

The ECB rate decision and Lagarde’s press conference could go a long way in determining the short-term direction of the EUR/USD. We could see a sustained rally over parity, or a drive through .9860 to the October 21, 2002 main bottom at .9686.

After the ECB, the focus could shift back to the Federal Reserve with its widely expected interest rate hike coming up on September 21.

Fed officials reiterated on Wednesday they still are not convinced that the worst of the U.S. inflation scare has passed, suggesting the central bank will continue to lift rates aggressively. At the end of the trading session on Wednesday, the CME’s FedWatch Tool showed investors believe there is a 78% chance of a 75-basis-point rate hike on September 21.

Finally, Fed Chair Jerome Powell will participate in a discussion at Cato Institute conference later in the day, which could be his final public comments before the September 20-21 policy meeting.

ECB Forecast

Based on the recent comments from several conservative ECB policymakers, traders now see a more than 80% chance of a 75 basis point rate hike. Furthermore, the updated ECB forecasts are expected to show sharply higher inflation but significantly weaker economic growth.

In my opinion, the ECB is going to have to go big with the rate hike, or risk weakening its inflation-fighting credibility even if it means driving the economy into recession.

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart. A trade through 1.0079 will change the main trend to up. A move through 1.0089 will reaffirm the uptrend. Taking .9860 will reaffirm the downtrend.

On the downside, the nearest support is a pair of 50% levels at .9977 and .9940. On the upside, the nearest resistance is a pair of 50% levels at 1.0034 and 1.0116.

Daily Swing Chart Technical Forecast

Trader reaction to the 50% level at .9977 is likely to determine the direction of the EUR/USD on Thursday.

Bullish Scenario

A sustained move over .9977 will indicate the presence of buyers. This could trigger a surge into 1.0034, followed by the main tops at 1.0079 and 1.0089.

Taking out 1.0089 should lead to a test of 1.0116. This is a potential trigger point for an acceleration to the upside.

Bearish Scenario

A sustained move under .9977 will signal the presence of sellers with .9940 the next downside target. If this level fails then look for the selling to possibly extend into the support cluster at .9864 to .9860. The latter is a potential trigger point for an acceleration to the downside.