Week Ahead: Euro Volatility To Intensify Ahead Of ECB?

Everybody was talking about the euro after the currency hit its lowest level in nearly two decades, flirting with parity amid the widening policy divergence between the Fed and ECB.

The price action around the psychological 1.000 level felt like a fierce tug of war between bulls and bears with no clear winner in sight. Indeed, various fundamental forces were at play – placing traders on an emotional rollercoaster ride all week!

Calendar for next week

The last few days were certainly wild for the EURUSD but this could intensify in the new trading week thanks to key economic reports and risk events. More volatility could be on the cards for the euro but before we cover what to expect from the currency, here are the scheduled economic data releases/events in the coming week:

Monday, 18 July

• CAD: Canada housing starts
• NZD: New Zealand CPI
• USD: US cross-border investment
• GBP: BoE MPC member Michael Saunders speaks

Tuesday, 19 July

• AUD: RBA meeting minutes
• EUR: Eurozone CPI
• GBP: UK jobless claims, unemployment, BoE Andrew Bailey speech
• USD: US housing starts

Wednesday, 20 July

• CNH: China loan prime rates
• GBP: UK CPI, PPI
• EUR: Consumer confidence
• USD: US existing home sales

Thursday, 21 July

• JPY: Bank of Japan rate decision
• EUR: ECB rate decision
• USD: US initial jobless claims

Friday, 22 July

• JPY: Japan CPI
• EUR: Eurozone S&P PMI
• GBP: UK S&P PMI
• CAD: Retail sales

Caution is likely to remain the name of the game in the week ahead as inflation fears, recession concerns, and ongoing geopolitical risks drain investor confidence. Given how markets are quite sensitive and reactive to key economic reports, this could spark some action in the FX space with the mighty dollar seen benefiting from safe-haven flows. Over the weekend, the meeting of G20 finance ministers and central bank governors continues in Indonesia. It may be wise to also keep an eye on the final Eurozone CPI figures for July which will be released on Tuesday.

Let’s cut to the chase…

All eyes will be on the European Central Bank meeting on Thursday. The central bank is widely expected to raise interest rates for the first time since 2011! Markets are pricing a 25-basis point move which would keep rates in the Eurozone still in negative territory despite inflation hitting a new record high of 8.6% according to preliminary estimates. When considering how the euro slipped below parity, this could invite more hawks to the table…

It may not hurt to expect the unexpected from the central bank with a surprise 50-basis point hike catching markets off-guard.

Ultimately, if the central bank lets the euro weaken further – this could fuel inflationary pressures but fighting back by hiking rates could punish an economy already facing a possible recession.

Whatever happens during the ECB meeting, it may have a lasting impact on the euro. Taking a quick look at the EURUSD, it’s all about the psychological 1.0 parity level. Watch this space.

S&P 500 bears still in the building

The S&P 500 remains bashed by the risk-off sentiment and lack of appetite for risk. As recession fears and inflation jitters send investors sprinting towards safety, this continues to weigh on riskier assets. Since the start of 2022, the index has shed over 20% with prices trading around 3779. Equity bulls clearly need a lifeline and this could come in the form of US earnings. Nevertheless, the technicals remain bearish with sustained weakness under 3810 opening a path back towards 3700 and lower.

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