The European Economy Falters, But The ECB’s Tightening Momentum Probably Won’t

The EURUSD currency pair has primarily been driven by risk-off sentiment in recent weeks, with the most recent risk-off event being the potential of a U.S. Default. With that crisis now resolved and out of the way, traders have a playing field with fewer risks from a U.S. perspective. The U.S. economy has shown signs of moderation in services and manufacturing activity while inflation has tapered off, leading to more expectations of a pause in rate hikes.  

Across the Atlantic, The European Central Bank (ECB) tightened its belt on the economy with a hefty 3.75% of interest rate hikes in less than 12 months. The effects of monetary tightening are now taking shape, with inflation down from its peak of 10.6% to 6.1%. In addition, Europe’s largest economy also slipped into a recession, with two consecutive quarters of negative growth.  


The EURUSD currency pair was forced into a downtrend, with the price crossing below the 100-day moving average and moving in a descending channel pattern. Support and resistance were established at the 1.06356 and 1.08292 levels, respectively.  

A rejection of the support level gave bullish traders fifteen minutes of fame as they piled into the pair leading it into a breakout above the descending channel pattern. However, their momentum could only go as far as the 61.80% Fibonacci Retracement Golden Ratio at the 1.07548 level, where bearish traders lurk. If bearish momentum persists, the pair could be led towards support at the 1.06356 level. 

In contrast, the 1.06356 level will likely hold as a support level if the price retests. Given that demand outweighs supply at the level, bullish traders could be in contention to go long from support, with the 1.07548 level the most likely point of interest.  


The market is now pricing in an 80% chance of a pause in the upcoming Fed meeting, which could boost risk appetite. The ECB has reiterated that it is committed to bringing inflation down to 2%, and more rate hikes are likely. The interest rate outlook divergence between the Federal Reserve and ECB will likely boost the Euro in the medium term, making the 1.07548 level probable.  

Fuentes: Eurostat, Reuters, TradingView