EURUSD breaks above $1 parity on a weaker dollar and ahead of ECB hike

The EUR/USD pair managed to climb back above the $1 parity level on Wednesday morning for the first time since September 20, 2022, driven by the weakness of dollar and bond yields coupled with the widely expected 75bps rate hike by the European Central Bank on Thursday to curb inflation.

The bullish sentiment for the dollar has reversed in the last few trading sessions as investors believe that the recent signs of economic and manufacturing weakness in the world’s biggest economy, should increase the speculation for a less hawkish Federal Reserve, sending the greenback tumbling.

Market participants hope that the Federal Reserve would slow the pace of interest-rate increases following some dovish Fed talks last Friday, predicting another 75 bps increase next Wednesday, but the view is growing for a slowing to 50 bps in December, and even 25 bps in January and February 2023.

Given the speculation that the weaker U.S. data may slow the pace of Fed rate hikes, the U.S. 10-year Treasury yields continued their descent from last week’s multi-year highs at 4.335%, sliding to 4.03% this morning, while the 2-year bond yield was last down to 4,44%, coming off the 14-year high of 4,67% last week.

As a result of the falling bond yields, the DXY-dollar index which tracks the greenback against six major peers has retreated from the late-September multi-decade high of 115 mark to today’s three-week low of 110, triggering a solid bounce in major currencies including the beaten-down Euro, Sterling, Yen and risk-sensitive Australian and New Zealand dollars.

EUR/USD pair, 2-hour chart

With a weakening dollar and yields, things have been changing quickly across the forex board, with EUR/USD moving up to 1.005 this morning for the first time in five weeks, GBP/USD is up over 100 pips on the day so far pushing above $1.16 resistance level for the first time since mid-September, USD/JPY fell as low as ¥146, while the antipodean Australian and New Zealand dollar climbed to near $0,65 and $0,582 respectively.

The improved risk sentiment and the softening dollar and bond yields have also triggered a mini rally in the cryptocurrency sector, with Bitcoin adding 4% to $20,700, Ethereum jumping 6% to $1,550, Solana to $32, while Mana bounced to $0,65.