We expected that the gains in the EUR/USD price would be temporary, as the price jumped towards the 1.0748 resistance level, following new tightening comments by European Central Bank Governor Lagarde. The pair returned to decline quickly after the markets absorbed the statements to the support level 1.0642 and settles around the level of 1.0670 at the time of writing the analysis, before announcing the growth rate of the US economy.
European Central Bank President Christine Lagarde said officials would not rush to withdraw stimulus as her French colleague echoed her to insist there was no consensus on a half-point rate hike. A day after the European Central Bank president's schedule of quarter-point increases angered hawkish officials wanting the option to act more aggressively.
"I don't think we're in a situation where there is a lot of demand right now," Lagarde said at the World Economic Forum in Davos, Switzerland. “It is certainly supply-side inflation of the economy. And in that case, we have to move in the right direction, of course, but we don't have to rush, and we shouldn't panic.”
Lagarde spoke after publishing a blog post effectively setting the course for the ECB's next three scheduled decisions that will put the institution on track to finally exit sub-zero monetary policy and align more closely with its global peers already working against the threat of inflation. Villeroy's notes indicated that he and other officials are currently in agreement with her schedule.
"The 50 basis point rise is not part of the consensus at this point, I'm clear," the governor added. She added: “It will be a normalization of our monetary policy, it will not be tightening,” and “the increase in interest rates will be gradual.”
Under Lagarde's calendar, the European Central Bank will end its bond purchases in June, raise once in July and once in September, raising the deposit rate from -0.5% to zero. That timetable has angered colleagues who want to keep open the option to act faster, according to people familiar with the matter. “When you get out of the negative level, it could be at zero, and it could be just above zero,” she said, dismissing concerns about whether the central bank might consider a 50 basis point move. "This is something we will determine based on our expectations, on the basis of our future guidance."
Both Lagarde and Villeroy see rates moving higher to a level considered neutral, which could be between 1% and 2%. For his part, the French governor has set a vision to reach that range “sometime next year”, which would imply a whole series of price increases within the next 18 months. Investors are betting on four increases of 25 basis points by the European Central Bank by the end of 2022.
The European Central Bank chief played down the risks of a recession in the region, saying that “at the moment, we are not experiencing a recession in the eurozone.” She cited "low rates" of unemployment, large household savings, and the prospect of a strong summer for the tourism industry as forces that would offset negative shocks from the war and record inflation. Villeroy agreed: "When we look at the activity it's still resilient in Europe." “We will continue to have significant growth this year.”
According to the technical analysis of the pair: There is no change in my technical view for the price performance of the EUR/USD currency pair. It is still at the beginning of breaking the descending channel and lacks sufficient momentum to confirm this, as it is necessary to move towards the resistance levels 1.0795 and 1.1000, respectively. To do that I still see any gains in the Eurodollar will remain up for sale as long as the Russo/Ukrainian war continues, and the ECB rate hike still has time. On the downside, the support level at 1.0485 will be the starting point for the bears again. The Euro-dollar does not expect important European data today, and all focus will be on the announcement of the growth rate of the US economy and the weekly jobless claims.
