Standard Inflation and European Central Bank Rates » What is the impact of the euro on forex?

Will record inflation and a possible rate hike from the European Central Bank boost the euro?

It seems that the July ECB rate hike is very much on the table and negative rates will soon be a thing of the past. What will be the impact of the euro on forex?

Eurozone CPI was revised slightly lower this morning, but that won’t change anything as inflation at 7.4% is still at an all-time high. We’ve been hearing a lot of hawkish statements from several ECB officials lately and it’s likely only to increase. So, will we see the EUR/USD pair forming a base around 1.05 and moving higher in forex, instead of descending into parity?

More war-warming rhetoric from ECB policy makers

Olli Rehn was the last to make a hawkish statement this morning, saying that interest rates need to move relatively quickly out of negative territory. Ren said the need to continue the gradual process of monetary policy normalization is partly due to increased uncertainty about future price developments, effectively acknowledging, like his peers, that their forecasts were wrong. Ren already made some hard-line statements earlier this month, so that’s nothing new.

Pablo Hernandez de Cos, another ECB policymaker, echoed Olli Rehn, calling for a gradual withdrawal of stimulus measures, which is “appropriate” in the current context. He added that interest rates could be raised in the coming quarters.

So it looks like a July rate hike is very much on the table and negative rates will soon be a thing of the past. The only problem is that the economy is in a testing period and the ECB will have to be very careful trying to balance the risks to growth associated with tighter monetary policy conditions. But the fight against inflation is real, and they simply cannot allow price pressures to rise further or continue to rise for long.

The node introduces the idea of ​​raising the interest rate by 50 basis points

On Monday, the euro received a forex boost after Governing Council member Klaas Knott said the European Central Bank is expected to raise interest rates in July by 25 basis points, but a 50 basis point rise should not be ruled out if the data points to higher inflation.

While I don’t think we’ll see a 50bp rally, Knot’s comments show that the ECB is determined to start its fight against inflation. Markets seem to agree on pricing around 105 basis points of ECB hikes by the end of 2022.

EUR/USD gives hope to the bulls

Source: StoneX and TradingView

Thanks to the European Central Bank’s recent hawkish messages, the pair EUR / USD It returned above the previous support at 1.0470 to 1.0500. A retest of this area from below should offer some resistance on Monday. But this is not the case. This begs the question, are the bears the group of trapped speculators? If so, we could see a rally to the most recent high above 1.0640 as I would imagine the buying stops have certainly settled. Incidentally, a move north of 1.0640 would also push interest rates above the March 2020 low, leading to a potentially lower long-term.

However, if prices move lower and break through the aforementioned support area below 1.0470, all bets are off again. This would be bearish, so a drop to the January 2017 low of 1.0340 would not surprise me.

By Fouad Razakzadeh, »Official website fomc

Not giving an opinion: The information and opinions in this report are provided for general information only and do not constitute an offer or solicitation to buy or sell foreign exchange contracts or contracts for difference. Although the information herein is from sources believed to be reliable, the author does not guarantee its accuracy or completeness, and assumes no responsibility for any direct, indirect or consequential damages that may result from any person relying on such information.

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