EUR/USD is recovering ground above 0.9900, as the US dollar rally takes a breather amid retreating yields and risk-aversion. Investors brace for a 50 bps rate hike by the ECB this Thursday, in the face of the deepening European energy crisis.

EUR/USD has rebounded above 0.9900 early Wednesday after having closed the first two trading days of the week in negative territory. Although the near-term technical outlook doesn't point to a buildup of recovery momentum, euro sellers could stay on the sidelines ahead of the European Central Bank's (ECB) monetary policy announcements on Thursday.

The Relative Strength Index (RSI) indicator on the four-hour chart stays slightly below 50 and the 20-period SMA stays above EUR/USD, suggesting that the pair is yet to gather recovery momentum.

On the upside, 0.9935 (20-period SMA) aligns as immediate resistance ahead of 0.9980 (static level, 50-period SMA) and 1.0000 (psychological level, 100-period SMA).

Supports are located at 0.9900 (psychological level), 0.9880 (static level) and 0.9860 (20-year lows).

On the other hand, several ECB members sounded relatively cautious regarding an aggressive policy normalization on Tuesday and reminded investors of the policy divergence between the Fed and the ECB. ECB policymaker Martins Kazaks argued that a broad and protracted recession could slow rate hikes while policymaker Yannis Stournaras argued that inflation in the eurozone was close to its peak.

EURUSD has also broken the trend line on lower time frames i.e M1, M5 and M15 which was followed by a retest to complete the correction before continuation to the upside. 

Currently the market does not appear to be positioned for the possibility of a 75 basis point increase and any decision on such an increase will come as a pleasant surprise to buyers of the currency and is expected to drive the pair higher.

In any case I maintain the strategy to buying on dips of the pair as the pattern of corrections continues with excellent fidelity.

A Hawkish Maneuver Expected Prior to Release of ECB Rates

Sep 07 2022