Recently, the monetary policy officials of the European Central Bank increased the talk about the most appropriate time to raise interest rates to keep pace with the path of the rest of the global central banks. It is led by the US Federal Reserve to contain the hyperinflation caused by the epidemic and most recently the Russian / Ukrainian war. Accordingly, the EUR/USD currency pair found an opportunity to correct upwards to the resistance level of 1.0600, with a correction from its lowest level in five years. The currency pair is waiting for more momentum to move further out of the sharp descending channel.
Overall, the European Central Bank is moving towards a rate hike and the market is now considering the possibility of a massive 50bp hike in July, a development that could not be understood just weeks ago. The turnaround provided support for the Euro, especially against the British Pound which at the same time saw the Bank of England decline against market expectations of a series of rate hikes. “Relative rates have supported the pound against the euro for some time but not anymore with markets pricing in ECB rate hikes,” says Mikael Milhaug, senior analyst at Danske Bank. “Looking ahead, relative prices appear to be more supportive for the EUR/GBP.”
The minutes of the European Central Bank's April monetary policy meeting were released last Thursday and showed that Governing Council members were concerned that the rise in inflation expectations could become "disorderly". This describes a scenario that was an inflationary shock - in this case through higher energy and commodity prices - becoming embedded in the broader economy.
For example, through companies that raise the prices of goods and services, while employees can demand higher wages. Some Council members believed that the ECB could not wait for real wage developments to confirm rising inflation expectations and the time for rate hikes was fast approaching. “European Central Bank members continued to send hawkish signals, clearly leading the market to risk a 50 basis point rate hike in July,” says Jan von Gerrich, chief analyst at Nordea Markets. The decisions are made by the hawks of the European Central Bank. The ECB's April meeting minutes just confirmed that hawks are increasingly gaining the upper hand in the discussions. The interest rate hike in July is no longer uncertain, the only uncertainty is whether it will be 25 basis points. or 50 basis points.”
In this regard, Dutch Central Bank Governor Claes Knott said in a recent interview that the European Central Bank should raise its key interest rate by 25 basis points in July, but it should not rule out a larger increase. "A larger increase should not be ruled out," Knott said. "The next logical step would be half a percentage point."
Nordea notes that market prices are now within 35 basis points of the highs that fell at the July meeting. A 50 basis point rise was unimaginable just weeks ago, and from a currency perspective, a lot depends on whether or not the ECB is meeting market expectations. For example, if the European Central Bank pushes this rate back, the euro will be responsible for giving back value to the British pound, the dollar, and other countries. (It can also be assumed that he has recently found momentum in support of rate hike expectations.)
If the European Central Bank validates this forecast and delivers a 50 basis point rise with its pointer to the possibility of further rallies, the EUR could gain value. The European Central Bank has consistently insisted that it only intends to normalize monetary policy gradually, and large 50bp hikes appear to be inconsistent with this guidance.
According to the technical analysis of the pair: Despite the recent rebound attempts of the EUR/USD currency pair, the general trend is still bearish. It is necessary to move strongly upwards to change, and the real reversal may occur, according to the performance on the daily chart below, by moving towards the resistance levels 1.0795 and 1.1000. In return the bears have the opportunity to return to the launch if the EUR/USD pair returns below the 1.0440 support level. The euro is awaiting the announcement of the important German Ifo number today and the German Central Bank report, amid a complete absence of important US economic data.