EUR/USD loses the grip and drops below parity ahead of ECB

The European currency loses some shine following Wednesday’s strong gains and forces EUR/USD to return to the sub-parity levels on Thursday.

EUR/USD focuses on ECB, Lagarde, Powell

EUR/USD so far trades with modest losses in the 0.9980 region, coming under some selling pressure after the earlier failed attempt to extend the bounce further north of the parity zone.

The renewed weakness in spot comes along a small uptick in the German 10y Bund yields, which hover around the 1.60% region prior to the ECB event.

It is worth recalling that investors remain positioned for a ¾ point rate hike from the ECB at its meeting later on Thursday. Traders’ shift from a 50 bps raise to a larger one has been magnified following higher-than-expected inflation figures in the euro area for the month of August.

In addition to the ECB’s interest rate decision, the usual press conference by Chair C.Lagarde will also take centre stage as well as the updated ECB Macroeconomic Projections.

In the US docket, Initial Claims are due seconded by Consumer Credit Change. In addition, Chief Powell will speak at a virtual event.

What to look for around EUR

EUR/USD now looks offered after piercing the key parity level earlier in the session on Thursday.

So far, price action around the European currency is expected to closely follow dollar dynamics, geopolitical concerns, fragmentation worries and the Fed-ECB divergence. The latter, in the meantime, keeps closely following the prevailing debate around the size of the next interest rate hikes by both the ECB and the Federal Reserve.

On the negatives for the single currency emerge the so far increasing speculation of a potential recession in the region, which looks propped up by dwindling sentiment gauges as well as an incipient slowdown in some fundamentals.

Key events in the euro area this week: ECB Interest Rate Decision, Lagarde press conference (Thursday) – Eurogroup Meeting, Emergency Energy Meeting (Friday).

Eminent issues on the back boiler: Continuation of the ECB hiking cycle. Italian elections in late September. Fragmentation risks amidst the ECB’s normalization of its monetary conditions. Impact of the war in Ukraine and the persistent energy crunch on the region’s growth prospects and inflation outlook.

EUR/USD levels to watch

So far, the pair is retreating 0.13% at 0.9989 and a drop below 0.9863 (2022 low September 6) would target 0.9859 (December 2002 low) en route to 0.9685 (October 2002 low). On the upside, there is initial barrier at 1.0090 (weekly high August 26) ahead of 1.0161 (55-day SMA) and then 1.0202 (August 17 high).