Risk event for the week starting 18 July: ECB rate decision

(Video Transcript)

Welcome, let's take a look now at a Risk Event for the week starting Monday 18th July.

Warren Venketas joins us now from DailyFX with his view on a trade to watch out for and an event to hinge it against. What are you looking at, Warren?

ECB interest rate decision

Morning Jeremy, and thanks for having me. So my Risk Event for next week revolves around the European Central Bank's (ECB) interest rate decision and, therefore, the euro, more specifically, EUR/USD.

To begin with the US economy, they've sort of set the scene for a 100-basis point (bps) rate hike in the next Federal Reserve (Fed) rate announcement. This is slowly gaining traction after we've seen sticky US inflation, which was supported by yesterday's PPI beat.

From a Europe perspective, we've seen economic sentiment plummet within the Eurozone, while Italian politics have managed to widen the Italian government bond to German bond spread, which is obviously gloomy for Italy and, by extension, the Eurozone.

Finally, we have the looming energy crisis in Europe via Nord Stream 1. Nord Stream 1 is a major gas pipeline connecting Russia and Europe. So this has been offline for routine maintenance, as reported, and is scheduled to come back online on the same day as the ECB interest rate decision next week Thursday. So a lot of volatility around that. We're not sure if it will come back online due to political uncertainty.

If we look at the ECB, they have pre-announced a 25-basis point rate hike next week. There is a possibility for hawkish surprise around that 50-basis point mark and money markets are currently sitting around 30 to 35-basis points as we speak.

EUR/USD trade setup

From a trade setup perspective, we have the daily EUR/USD chart on the screen.

We've seen EUR/USD bears knock at the parity door several times this week without managing a daily candle close below parity support. But I believe, under the current fundamental backdrop, the December 2002 swing low at $0.9854 is on the cards.

So, I'll be looking at a short EUR/USD heading into that ECB rate announcement with a stop around the recent swing high at $1.0122 for a slight positive risk-to-reward ratio.

That being said, come Thursday should Nord Stream 1 come back online and the ECB hawkishly surprise with a 50-basis point rate hike, or anything above 25-basis points, this could invalidate this short-term bearish outlook. So, basically the outcome of these two Risk Events will determine the short-term directional bias thereafter.

So, a lot to look out for next week Thursday.

Great, Warren thanks very much indeed. One of the key trades to watch out for around that ECB decision.

Warren Venketas there from DailyFX with the EUR/USD trade around the ECB interest rate decision. That's the Risk Event for the week starting Monday, July 18th.