EUR/USD broke the key 1.0500 support yesterday as a rocky risk environment continued to favor a stronger dollar. At the same time, uncertainty around the implications of the Ukraine war in Europe remains elevated.
Now, the next major support to watch is the 1.0340 January 2017 low. A break below such a level would make the risk of EUR/USD hitting parity quite material. As we discussed last week in this article, we wouldn’t be shocked to see the pair at 1.00 in the near term. Indeed, after losing the 1.0500 “anchor”, EUR/USD volatility may well increase again.
A break below 1.0340 may not be a story for today, as the US session could endorse the rebound in risk assets and ease some of the dollar’s momentum. The eurozone calendar includes industrial production figures for May, as well as a bunch of European Central Bank speakers, including Germany’s Joachim Nagel (who recently fully endorsed a July hike), the arch-hawk Isabel Schnabel, as well as Luis Guindos, and Mario Centeno.
The EUR has blatantly struggled to draw any tangible benefits from the increasingly hawkish tone among ECB policymakers, which in our view, boils down to the already quite aggressive tightening expectations (80-85 bp fully priced in by year-end).
Furthermore, lingering uncertainty around whether the ECB will be able to deliver many more hikes afterward, given the deteriorating economic outlook in the euro area.
Another technical break lower in EUR/USD in the coming days is a very material risk in this environment.