EUR/USD bounces off parity but risks remain skewed to downside

12 thg 7, 2022

The EUR/USD finally hit parity earlier amid fears of a Russian gas shutdown, rising hawkish bets on the Fed and downbeat risk sentiment. The final nail in the euro’s coffin was news of a considerable deterioration in the German economic outlook, according to the closely-watched ZEW survey.

But the historical and psychological significance of 1.0000 means we were always going to see at least a short-term bounce from this level. That’s exactly what happened, with rates rising some 60 pips from there.

Going forward, if there’s acceptance below 1.0000 then it is anyone’s guess far it could fall before stabilising. Psychological levels play a major role in FX. Policymakers at the ECB and elsewhere would also be watching such big levels. Don’t forget the role of the FX options market, where a lot of strike prices are based around such key levels. So, a potentially sharp breakdown below parity is still possible in the coming days. This could trigger option strategies that requires selling huge volumes of EUR/USD .

So far it is too early to call the bottom on the EUR/USD . What I would be looking for here from a bullish point of view is actually a sharp but brief break down of the parity level and then a quick recovery, followed by the formation of some nice bullish-looking daily candle pattern. If we see such a scenario – a false break down – then traders might start piling in on the long side. We could see speculators build large, long, positions in the subsequent days, using the most recent low as their invalidation point

By Fawad Razaqzada on behalf of FOREX.com