A last chance by policy hawks to steer markets ahead of the ECB rate decision next week has seen the probability of a rate rise nudge slightly higher, now up to 35% from sub 30% 0#ECBWATCH.
Despite this, the euro remains in a precarious position given the deteriorating economic outlook.

Therefore, even in the event of what would be a surprise rate hike – given current market pricing – EUR/USD would likely remain under pressure.

While underlying inflation remains stubbornly high at 5.3%, recent PMI data has fallen to recessionary levels, raising stagflation concerns for the euro zone.

In turn, with economic activity deteriorating notably, an additional rate hike would only exacerbate these issues further and thus hiking into economic weakness is unlikely to be a positive for the single currency.

For EUR/USD, the path of least resistance remains to the downside, particularly with the pair below its 200-DMA (1.0823).
A pause next week would leave the May low at 1.0635 under threat and potentially opens the door to 1.05. A surprise hike would likely see traders fade the initial knee jerk move higher given that it is unlikely the ECB would hike again in this cycle.

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