The tone of the European Central Bank's meeting statement and President Christine Lagarde's press conference on Thursday should determine the short-term direction of the euro, with the market broadly expecting a hawkish outcome.
The EUR/USD has been trading sideways since the start of June, following a recovery from the mid-May low at 1.0349. The recovery was driven in part by the hawkish pivot in ECB rhetoric after hot euro zone inflation data.
The ECB is not expected to raise rates at Thursday's meeting, but will announce the end their Asset Purchase Programme.
They are also expected to signal the start of a rate hiking cycle from July nL4N2XV24R.
The EUR was the best performing currency on Wednesday and only currency to rise against the greenback. The price action suggests the market expects the ECB to be decidedly hawkish and leave the door open for a 50 basis-point hike at an upcoming meeting. nL5N2XG320
The risk is for the ECB to be less hawkish by just signalling that rate hikes are coming, while remaining non-committal on size and scope.
If the ECB meets or exceeds hawkish expectations, EUR/USD could test key resistance at the 38.2 Fibonacci retracement of the 2022 high-low at 1.0787, which is also the May 30 recovery high.
A break above 1.0790 targets 1.0920-40 where the 50% retracement of the 2022 move and the 100-day moving average converge.
If the ECB disappoints the market hawks, the EUR/USD will likely break below the key 21-DMA at 1.0640 and shift the focus back to the multi-year low at 1.0349.
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