ECB/Fed Divergence Growing

EURUSD has hit 17-month lows today as a combination of weakened ECB tightening expectations and a stronger Dollar weigh on the pair. While both the Fed and the ECB are expected to hike rates again, the market is judging the ECB to be less aggressively hawkish here. Speaking this week. ECB’s Schnabel said that the next few months will be key for assessing the energy shock in the eurozone and determining where rates should go. Schnabel, who is typically among the ECB’s more hawkish members, expressing some caution here has been taken as a dovish sign by traders. On the other hand, we’ve heard a slew of Fed policymakers recently warning of the risks of inflation becoming entrenched at higher levels and the need for continued tightening. As such, USD is rallying on the view that the Fed is likely to tighten at a quicker pace than the ECB.

US Jobs On Watch

Looking ahead, tomorrow’s US NFP release will be key for EURUSD near-term. If data prints on the strong side, October Fed tightening pricing should soar once again, leading USD firmly higher and sending EURUSD lower. However, if data undershoots forecasts, this could see the market pricing out an October hike, causing a correction lower in USD and creating room for a recovery move in EURUSD.

Technical Views

EURUSD

The sell off in EURUSD has seen the market breaking down below the rising trend line from last year’s lows, testing below the prior YTD lows to trade fresh lows for the year. While below 1.1328 and with momentum studies bearish, focus is on a continuation lower with 1.1206 the next downside target to note.