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Down and running, for how long? – EURUSD


We woke up to the news that the money markets are now pricing in a full 25 bps hike in the rate by the ECB by the end of the year. We are talking here about OTC swaps (EONIA) and for now – as the futures market is not open at the time of writing – we cannot be more specific about the month the markets are pricing in, but it is most likely December. We can, however, show you yesterday’s situation, where the derivatives market was pricing in a total of 66 bps down for 2024, with a return to the CURRENT deposit rate (3.75%, not the official 4.25%) only in June, and the year closing – according to current expectations – at 3.50% (also on the deposit rate). In short, in 15 months from now the ECB rate is expected to fall by 0.25%. Not a lot. Higher for Longer.

There is a slight chance of a hike at next week’s meeting: odds stand at 40% which indicates that such a move would be perceived as a surprise leading to a decent short term rise in the EUR. Lagarde and company don’t seem to have any interest in providing such a surprise at the moment because despite sticky  core inflation, other economic indicators are quite negative. Perhaps they will try to play on other factors such as the premature end of the extraordinary quantitative easing programme PEPP or the change in minimum reserve margins required from the banking sector. For now, let’s focus on the EURUSD.


The technical situation of the EURUSD has deteriorated consistently in the space of a couple of months, from 1.1275 touched on 18/07 to the current 1.0746 (-4.69%): indeed, this pair looks worse off than the Cable we analysed yesterday, being clearly below the two long-term moving averages we are used to using (50d and 200d) and also below the slightly bullish channel that has guided prices since the beginning of the year (but still within the margin of error).

The 1.0735 area is very important and strong, having been the base (support) in the post covid period, from January to May 2020, before a rally in the 1.2270 area. But it was definitely a different economic context. We get at the week before the ECB also very close to the downtrend of the last 2 months, which now passes through 1.0845. Given also the normal persistence of currency trends, we tend towards a continuation of the bearish movement in the short term (at least until next week’s meeting), with supports in the area of 1.0675 and then 1.0590. 1.05 is also a very strong area.

What will happen on the day of the meeting is a binary outcome and a possible surprise from the ECB will give short term wings to the EURUSD and probably lead it to test the bearish red line. But let’s not forget that at the moment the long-term expectations between the US and European central banks do not differ that much (close to the end of the tightening cycle) and therefore other motivations will probably explain the future movement of this fundamental pair.

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Marco Turatti

Market Analyst

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