ECB takeoff, CPI and bond market turmoil

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Euro analysis

  • The ECB will finally get off the ground, Nord Stream maintenance ends and the resignation of the Italian Prime Minister
  • BTP/BUND Spreads Widen Before Immediately Pull Back – Volatility Rises
  • Key EUR/USD levels ahead of EU and ECB inflation

Risks rise in euro-defining week

The ECB will finally take off

This week, Thursday, we have the rate decision from the European Central Bank (ECB). The highly anticipated 25 basis point hike has been widely reported by members of the ECB’s Governing Council for many weeks now, but there is still a possibility of a 50 basis point hike, especially if data from tomorrow’s inflation demand it.

End of Nord Stream 1 gas pipeline maintenance

An important transport route for Russian gas to Europe must be fully maintained on Thursday. In recent weeks, Germany’s economy minister has sounded the alarm about the possibility of bogus apologies outside Russia if normal gas flows do not return.

A gas cut or the continuation of sub-optimal flows poses a massive threat to the German economy as it impacts industrial production. Plans are underway for any eventuality. Today’s reports indicate that a crucial turbine is being transported to Russia and is expected to arrive on the 24the of July. The preparatory work should then take an additional 4 days.

Drag MariohI am motivated to resign after a vote of no confidence

The political challenges surrounding the expected resignation of Mario Draghi provide a rather undesirable headwind for the euro. The 5 Star Movement, an important part of the current government coalition, has decided not to support Mario Draghi in his vote of confidence. The Prime Minister has threatened that if the movement does not support him, he will resign – something he has already offered without the President’s approval.

The issue is due to be discussed in parliament on Wednesday and remains a headache for the euro until it is resolved. This morning we saw a rise in the BTP/BUND spread which is typically used to gauge the health/stability of the complex EU bond market. An explosion of this spread leads to higher borrowing costs for the most indebted country, in this case Italy, which can have a contagion effect for the other indebted countries (Portugal, Greece and Spain). Such a scenario could make raising interest rates more difficult for the euro zone.

BTP/BUND Spread Daily Chart

Source: Trading View, prepared by Richard Snow

Risk related to scheduled events: surprising lack of data in USD

Inflation data from the EU is due ahead of the highly anticipated ECB rate decision on Thursday. Inflation data in major economies tended to surprise on the upside. The ECB press conference will once again overshadow the actual rate decision unless we see anything other than the 25bps.

Decisive week for the euro: ECB takeoff, CPI and bond market turmoil

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EUR/USD: Levels to watch this week

EUR/USD built on Friday’s gains ahead of the ECB’s rate decision on Thursday this week. The move appears to be driven primarily by a weaker dollar as markets ease on rate hike expectations that arose after the Bank of Canada’s (BoC) surprise 100 basis point hike earlier this month. .

EUR/USD traded well above 1.0100 in early trading during the London session with 1.0180 the next level of resistance. Given the fundamental outlook for the EU right now, such a bullish pullback should be short-lived. There are of course scenarios where we could see the euro continue to strengthen: A shock 50 basis point rise, which would result in a bullish revaluation and a cordial solution to the political impasse in Italy which would act more as a stabilizing influence than as a driver of the strength of the euro.

The RSI is printing above the oversold region, raising questions about how long we might see higher prices. The MACD could help shed some light on this as Euro bulls eye a possible bullish cross as the MACD line approaches the signal line.

EUR/USD daily chart

Decisive week for the euro: ECB takeoff, CPI and bond market turmoil

Source: Trading View, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnotowFX

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