The euro/dollar pair is still trading in the 0.9870-1.0000 range ahead of the ECB meeting. On September 8, the regulator will announce its monetary policy decision.
Notably, traders have almost settled below the parity level. In late August, the pair hovered around 1.0000, and EUR/USD bulls tried to stay firm above the barrier. However, the situation changed in September. This week, for instance, the price rose above parity not even once despite repeating bullish impulses. This means that traders are no longer afraid to go short below the mark of 1.0000. On the one hand, it is a clear fact. On the other hand, it is a remarkable event that allows bears to move to new price targets. Back in July, when the price went below the parity level, traders immediately rushed to lock in profits. Today, traders are settled in the new price zone with the upper limit at 1.0000.
Volatility is highly likely to soar after the ECB's September meeting. At the same time, market expectations are somewhat heightened. Reuters insider reports and the hawkish comments of certain ECB officials could play tricks on the euro if the regulator actually decides to hike rates by 75 basis points. There is such a possibility, according to the latest Reuters survey.
Only half of the respondents (34 out of 67) forecast that the European regulator will increase the refinancing rate by 75 basis points to 1.25%. Meanwhile, 25 experts suggest the bank will lift the rate by 50 basis points, and 4 economists bet on a 25 basis-point hike in September. They believe that aggressive tightening could trigger a burst of financial bubbles, citing the ECB's balance sheet.
As we can see, experts have different points of view about the outcome of the September meeting. However, hawkish expectations increased after the recent comments of some ECB officials. In particular, the heads of the central banks of the Netherlands, Germany, and Estonia said this week that the ECB should raise the interest rate by 75 basis points. The Reuters insider report published in late August says that many ECB officials advocate or at least mull over the idea of a 75 basis-point rate increase.
Naturally, when the outcome of such events is unpredicted, market volatility soars. In this case, we may anticipate strong swings in prices of currency pairs containing the euro, including EUR/USD.
Against the current background, there is a high likelihood of the hawkish ECB. The regulator first hinted at the possibility of a 75 basis-point rate hike at the Jackson Hole symposium in late August. Interestingly, even Governor of the Bank of France Francois Villeroy de Galhau, who is known for being cautious on the matter, adopted a hawkish stance on interest rates, saying the ECB needed "significant" rate hikes in September.
As a reminder, the latest inflation report in the eurozone came in the green zone, like almost all the previous ones. Consumer prices hit 9.1% in August. Core inflation, excluding energy and food prices, rose to an all-time high of 4.3%.
Generally speaking, the ECB could lift rates either by 75 basis points or 50 basis points (the less likely scenario) tomorrow. In the first case, the euro could encounter brief support, and EUR/USD could go above the mark of 1.0000 (also temporary). Otherwise, in the case of a 50 basis-point rate increase, the pair may feel strong pressure: bears could test and consolidate at the lower limit of the 0.9870-1.0000 range.
In any case, it would be unwise to go long: the euro is likely to remain weak even if the ECB raises the rate by 75 basis points. The escalating energy crisis in Europe will keep weighing on the euro. Once the ECB's meeting is over, the market will shift the focus to the Fed's. Due to the latest hawkish statements by Fed representatives (including Chair Powell), the US regulator could hike rates by 75 basis points in September, November, and even December.
In other words, now is the right time to sell the instrument, even if the ECB is hawkish. Shorts could be considered on a rebound to the 1.0000-1.0050 range, with targets at 0.9950, 0.9900, and 0.9870.
