Throughout last week's trading, the performance of the EUR/USD currency pair was characterized by moving in an upward path supported by stability above the psychological resistance 1.1000. The EUR/USD exchange rate rose against the dollar in the last session of the week as financial markets pondered the economic data of the Eurozone and what it might mean for the interest rate policy of the European Central Bank (ECB) which is now increasingly dividing the views of analysts and economists on the outlook.
Economic Outlook
German factory orders fell 10.4% in March, much more intensely than the -2.4% expected by economists when statistics agency Destatis released the data on Friday while French industrial production also fell by more than expected, leaving Italian retail sales rising by zero percent in March. It seemed to be the only bright spot in last Friday's data.
While Italian retail sales fell -0.3% in real or inflation-adjusted terms, economists were on average looking to see them decline -0.3% in direct or overall terms, so the data seems to cast the Mediterranean country as a bright spot in the broader eurozone economy.
For her part, European Central Bank Governor Christine Lagarde said at the press conference last Thursday, “It is clear that the interest rate decisions that we have taken and the level of interest rates that we take have an impact. Is this enough impact yet? We do not know". And she added, “We do not see a transition at this point in time to what I call the second leg of the economy, which is real activity, which has an impact on prices and then reduces inflation. The full cycle we haven't seen yet.”
All in all, last Friday's data is important because the real economy is increasingly becoming the focus of the European Central Bank, which watches economic data closely for signs that interest rate policy is having the desired effect to lower demand, spending and prices outside the food and energy categories.
Headline inflation in Europe rose from 6.9% to 7% when data for April was released on Tuesday, but core inflation fell from 5.7% to 5.6% once energy and food were removed from the basket of goods in which prices are measured. Meanwhile, the ECB made a clear commitment to raise interest rates further, but a commitment cautioned against relying on emerging economic data over the coming months and conditional on the wheels not falling off the financial sector or broader economy along the way. This was after a survey of bank lending for the first quarter earlier last week showed that real economic demand for credit had so far been impervious to the effects of the bank's monetary tightening, even as corporate demand for new borrowing slowed markedly.
It is for this reason that the ECB's judgment that borrowing costs are likely to rise further remains until it is "sufficiently constrained" to ensure a timely return of inflation to the 2% target, leading to a more nuanced set of opinions by analysts and economists on the future outlook.
In this regard, Mark Wall, chief economist at Deutsche Bank, said, “The European Central Bank has now raised the interest rate on deposits by 375 basis points over 9 months, which is a very rapid tightening.” And “We interpret the recent ECB decision as a ‘hard 25 decision’.” First, between the action to accelerate the complete exit of APP reinvestments and the lack of action on TLTRO, the ECB's decision had the maximum deflationary effect on its balance sheet. Second, the policy statement contains many hard-line elements, including a description of inflation, inflation expectations remaining above target despite the core support index tightening, and soft guidance to expect further hikes (plural).
For his part, Sven Gary Sten, chief economist for Europe at Goldman Sachs, said, “Taken together, today's call was close to our expectations and we maintain our forecast for a rise of 25 basis points in June and July at a rate of 3.75%.” And “While a further sharp tightening in financing conditions (for example, on the back of renewed banking concerns in Europe) could lead to an early end to the tightening cycle, we still see risks around 3.75% tilted to the upside given continued resilience in the market.” growth, strong wage growth and our firm forecast for core inflation, which remains significantly higher than ECB staff expectations.”
Euro predictions against the dollar today:
- The stability of the price of the EUR/USD currency pair will remain around and above the psychological resistance 1.1000, supporting the bullish trend.
- More positive momentum for the euro may support the bulls in moving upwards, with gains that may extend to the resistance levels 1.1070, 1.1120, and 1.1200, respectively.
- On the other hand, and according to the performance on the daily chart below, breaking the support level at 1.0920 is important for the bears to start controlling the trend.
- The next support break at 1.0880 will be to confirm that.
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