The euro tried to consolidate after European Central Bank President Christine Lagarde tried to calm market expectations of higher interest rates in the euro zone by appearing before EU lawmakers. As for the EUR/USD currency pair, it is settling above the resistance 1.1400. Its strongest gains recently reached the resistance level of 1.1484. The turn of the European Central towards tightening surprised investors and markets together where the euro was thirsty for that signal. The rest of the global central banks led the tightening path to confront the global record inflation.
For her part, European Central Bank Governor Lagarde, who appeared before a hearing in the European Parliament, said there was “no need to rush” to reach conclusions about the ECB’s intentions to tighten monetary policy. The comments could limit rising expectations of a rate hike in the eurozone and come just days after Lagarde’s green-lit forecast to raise the first rate hike in 2022 by dropping previous guidance that explicitly stated that no such move would occur this year.
At the European Central Bank meeting in February, Lagarde said that Governing Council members were now unanimous in their concerns that inflation had become elevated, and that therefore some action on interest rates would be needed to ensure prices stabilized again at 2.0%. But Lagarde said this week that there was a “real chance of stabilizing inflation” at the 2% target, which she said would lead to “the normalization of our monetary policy”.
Analysts and economists do not expect the European Central Bank to rush out. The European Central Bank last week simply saw a turning point. It opened the door to a faster reduction in asset purchases and to an interest rate hike this year.
Lagarde added that the ECB intends to “take the necessary decision” in March, which will include a “phasing down” of the asset purchase program; a prerequisite for evaluating increases. As a result, the yield paid on Eurozone bonds rose last week, raising the cost of borrowing across the region. This is after the European Central Bank signaled a shift in thinking that brought it closer with other major central banks closing the door to an easy policy in the face of rising inflation. Higher bond yields pushed up the euro’s exchange rates side by side.
Looking ahead, a lot now depends on the Euro exchange rates on whether the market has become too aggressive about the prospects for rate hikes and whether the rate is going down. The simple rule of thumb is that if the market is pricing in higher interest rates, the Euro will rise even more. If some of the expectations built up since last Thursday fade, the single European currency could give up some of the gains. Financial market expectations for a rate hike from the European Central Bank have risen significantly over the past month with the front end of the euro curve now priced at 50 basis points for 2022, or two increases, said Kenneth Brooks, an analyst at Société Générale.
Prior to last Thursday’s policy report, the curve was at one 25 basis points higher.
Chiara Silvestre, an economist at UniCredit, says the euro money market is now priced at an increase rate of about 110 basis points by the end of 2023, of which it will fall 100 basis points by September 2023. The final price indicated by the market stands at 0.60 % from 2024, so pricing in the deposit rate is not much lower than the peak seen in the 2011 mini-cycle.
According to the technical analysis of the pair: So far, the price of the EUR/USD currency pair is still sticking to the pace of its recent gains, which supports the bullish reversal. It must be taken into account that profit-taking is possible at any time, especially if the US inflation numbers are stronger than all expectations. Currently, the closest upside levels are 1.1485, 1.1550 and 1.1630, respectively. On the downside, 1.1330 support will remain the gateway for the bears to return to the trend.
The EUR/USD currency pair may remain in narrow ranges until catalysts appear to move in one of the two directions.
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