While a few days ago the market was still speculating about the possibility of parties returning to the negotiating table, now fewer people believe it. Crude contracts added another 3% increase today and we may reach $100 per barrel for Brent by the weekend. This, of course, fuels expectations of interest rate hikes by the Fed in response to an increasingly inflationary environment.
The CME FedWatch model prices two 25‑basis‑point moves this year – the first in September (probability jumped to 99% from 54% last Friday) and a second in December with a 71% chance. Boldly, with a 25% probability a third move in April has begun to be priced. This signals that markets are increasingly counting on supply‑side disruptions to remain a major problem for a long time.
The dollar today is mixed – it gains against the NZD, JPY, and CHF, but loses against the EUR, NOK, and AUD. In the latter case, however, it can be explained – first, the euro is waiting for today’s ECB meeting (investors expect a more "hawkish" comment from Christine Lagarde, which would raise expectations for a September rate hike). Second, the Norwegian krone gains on the rising oil wave and expectations of another hike by Norges Bank.
Third, the Australian dollar reacted today to strong US labor market data (employment rose in June by 76,000 jobs), slightly boosting expectations for another rate hike by the RBA. However, this "anomaly" does not seem likely to persist. The thread of three Fed rate hikes by spring 2027 should stimulate investors’ imagination, especially before the July 29 meeting.
Geopolitical nervousness and concerns about rising money costs worldwide also affect equity markets. Wall Street reacted negatively to Alphabet and Tesla results, although Asian markets rebounded. Nevertheless, if the downtrend turns into a longer impulse, it will affect the dollar (risk‑off usually has a positive impact).
Today’s calendar, besides the mentioned ECB meeting (statement at 13:45, Lagarde conference at 14:30), also includes US weekly unemployment data (14:30) and Canadian retail sales results (same time).
EURUSD – false hopes about the ECB?
The probability of an ECB rate hike today is only 17%, while for the September 10 meeting it reaches 74%. The market sees that in a scenario of again rising commodities (oil and gas) bankers will be forced to respond, and the pause after the June hike may be short.
Nevertheless, hopes that today’s Lagarde will be very "hawkish" in her message may prove excessive – the ECB will likely point out that inflationary risks are rising again, but will refrain from strong wording until July inflation data are released, i.e. the doors to a September move remain open but are not (yet) clearly open.
This could disappoint and give a push to break the 1.14 barrier by EURUSD, given dollar‑friendly tension scenarios (risk‑off).
Daily EURUSD chart
The technicals suggest that breaking 1.14 and breaking the flag formation could lead to a stronger downward move with a risk of breaking the June trough at 1.1324 and testing old supports at 1.1275 and 1.1200.
