EUR/USD rallies on a softer US dollar as ECB’s decision awaited

the EUR/USD pair sharply advances, on the track of the same prevalent sentiment, earlier during the European session. Investors are interested in leaks that the ECB might hike rates more than 25 bps in the July meeting. The news brought about the EUR/USD pair’s jump from 1.0160 towards daily highs shy of the 1.0270 area.

As the New York session began, the EURUSD pair’s sudden bounce retreated towards the 1.0240 area, up by almost 1%. The EURUSD got bolstered by a risk-on impulse, as shown by worldwide equities climbing. The dollar remains softer according to the US Dollar Index, tumbling 0.82%, at 106.542, during the day.

Once the Dollar Index reached a fresh 24-year high, it sank more than 2.50%, as safety outflows ignited a US Dollar selloff. In the meantime, the US 10-year Treasury yield ascends above the 3% threshold, up by three bps.

Earlier in the European session, Eurostat reported the EU HICP for June, unveiling that inflation rose by 8.6% YoY, aligned with estimates and with May’s reading. The core figures showed an expansion of 3.7% YoY, signaling that for two consecutive months, HICP has stabilized. However, EUR/USD traders should be aware that in the US, something similar happened before seeing a resumption of US inflation to the upside.

It was reported that ECB policymakers might discuss a 25 of 50 bps rate hike. The money market future STIRs immediately have an 82% chance of the ECB increasing 50 bps while pricing in a 100% of 25 bps, something that EUR/USD traders should be aware of. The ECB is preparing an anti-fragmentation tool for peripheral countries like Italy as the ECB scrambles to tighten the spreads between the German Bund and the BTPs.

Financial analysts are still concerned regarding the ongoing energy crisis in the Eurozone. The EU Commission was worried that flows from Russia in the Nord Stream 1 pipe would be halted, increasing the bloc’s chances of recession.

Positive news emerged, as gas flows through the Nord Stream 1 will resume following the annual maintenance on July 21, but at reduced levels. The news was positive for the EUR/USD, easing recession tensions, which could trigger upside pressure on the major, which will benefit bulls, as USD buyers are still booking profits ahead of the ECB and Fed monetary policy meetings.

The US 2s-10-yield curve extends its inversion for the eleventh straight day, though less profound than on previous days. At the time of writing, the spread widened to -0.201%, as traders’ fears about recession remain. Nonetheless, unless Fed policymakers express concerns about economic growth, that would not deter them from aggressive tightening, which is negative news for EURUSD longs in the future.

The ECB and the Federal Reserve will have their monetary policy meetings in July. Currently, the ECB’s deposit rate lies at minus 0.50%, while the US Federal Reserve’s Federal funds rate (FFR) is at 1.75%, bolstering the appetite for the greenback. With expectations of the ECB hiking 50 bps and the Fed to move at least by 75 bps, differentials would tighten further, to 0.00% (ECB) versus 2.50% (Fed), meaning that the dollar would keep the upper hand.