EUR/USD: Traders are looking for clues as to the direction of rates

The moment has arrived: the ECB, wrapping up its Governing Council meeting this Thursday, rose its key interest rate by 25 basis points to 2.50%. That much was an open secret. However, the real focus lies elsewhere - specifically, the tone Christine Lagarde used: her choice of words will help clarify just how hawkish or dovish the President is, particularly as price pressures begin to mount with the price of oil having crossed the symbolic $100-per-barrel mark.

Edouard Faure, Head of Credit at Swiss Life Asset Managers France, believes "this is the last rate hike of the year and that the status quo should prevail over the coming months. While Eurozone growth has remained solid so far, the sharp rise in sovereign bond yields to levels not seen in over fifteen years signals that we are approaching a zone of tension. To date, the credit market has not seen a widening of spreads. Bond-issuing companies remain insulated, and these markets continue to appeal to investors (offering high absolute yields and attractive carry). Nevertheless, a continued rise in long-term rates could - much like in 2022 - impact both bond markets (by driving down bond prices for the long haul) and equity markets."

Geopolitics will inevitably loom over the press conference in Frankfurt. The US struck 4 Iranian oil tankers on Tuesday, and Iran retaliated on yesterday by claiming to have hit a US base in Jordan as well as several vessels. The exchange of strikes between the United States and Iran has pushed oil prices higher once again; Brent crude for November delivery crossed the $100 threshold on Wednesday morning for the first time since 24 July.

"There is a risk that the ECB might overreact to an external supply shock over which it has no control," observes Patrick Barbe, Head of European Investment Grade Fixed Income at Neuberger. "The Fed and the Bank of England have chosen not to do so, notably because rising bond yields are already dampening demand for credit - and consequently, investment, real estate, and consumption."

"Core inflation has risen less than expected, reviving the risk of a return to zero growth. It will also be interesting to see how the ECB interprets early signs of rising unemployment, given that the development of AI could further intensify pressure on the labour market."

Right now, the EUR/USD is trading at $1.16210.

KEY TECHNICAL INDICATORS
Since August 19, the euro/dollar currency pair has been testing its 200-day moving average (shown in brown) while seeking a clear trend. There is currently no technical signal justifying a position in either direction, as the pair continues to trade sideways within a very narrow range.

MEDIUM-TERM OUTLOOK
Based on the key technical factors mentioned above, our medium-term view on the EUR/USD is neutral. We will maintain this neutral stance as long as the EUR/USD remains between the support level at $1.1566 and the resistance level at $1.1711.