EUR/USD inter-markets: sidelined ahead of ECB

EUR/USD has gained over a cent following yesterday’s abrupt spike to the 1.1370 area in response to another disappointment from the US docket. This time, the ISM Non-manufacturing dropped below estimates to levels last seen in 2010, adding to previous lower-than-expected ISM Manufacturing and Non-farm Payrolls.

That said, market participants have quickly unwound USD-positions in the wake of the release, as expectations of a rate hike by the Fed later this month have started to lose momentum. In fact, and according to CME Group’s FedWatch tool based on Fed Fund futures prices, the probability of a rate hike in September has been trimmed to 15%, while it remains around 40% for the month of December.

Yields in German Bunds remain in the negative territory so far today in line with their US peers, all giving quite a mixed background and favouring some very near term consolidation.

Volatility tracked by VIX is so far meandering daily lows around 12%, retreating from recent peaks seen in late August/early September.

EUR/USD needs to clear the 1.1260 area - recent highs and the 23.6% retracement of the June-August up move – in order to allow another test of recent highs near 1.1370. On the opposite direction, the area around 1.1130 emerges as a strong support, consisting of the key 200-day sma and recent lows.