The main points of the article on EUR/USD :
- The ECB’s increasingly hawkish tone is benefiting the euro in the short term
- However, the economic slowdown should prevent the euro from a major reversal
- EUR/USD can continue its rebound even $1.10 In the next few weeks
The ECB’s increasingly hawkish tone is benefiting the euro in the short term
The EUR/USD pair has risen since last month after dropping to its lowest level since 2017 at around $1.0350. The main reason for this recovery of the single currency is the increasingly aggressive tone of the European Central Bank members towards inflation. Whereas the central bank committee’s consensus was in favor of very slow monetary normalization a few months ago, the consensus is now in favor of very fast normalization.
Christine Lagarde, president of the bank, announced her support for an exit from negative rates by the end of the third quarter, paving the way for a 25 basis point rate hike in July and September, respectively. A third rise is currently expected by market operators in October, and now a fourth rise in December.
Source: Tradingview / Valentin Aufrand
The ECB’s tougher stance benefits the euro, as evidenced by the interest rate differential between German and US two-year bond yields. The spread went from -260 basis points in May to -200 basis points. The narrowing of the spread in recent weeks indicates a greater revision of interest rate hike expectations in the Eurozone than in the US.
However, the economic slowdown should prevent the euro from a major reversal
In fact, the monetary tightening of the European Central Bank and the evolution of the expectations of market operators will largely depend on the development of inflation in the coming months. The longer inflation persists at elevated levels without showing signs of slowing, the faster the European Central Bank (and Federal Reserve) will raise interest rates and vice versa.
However, a significant upward swing in the exchange rate appears unlikely in the coming months given the global economic slowdown. In fact, the euro and other procyclical currencies such as the Australian dollar tend to underperform the dollar in times of downturn and risk aversion.
The next big uptrend in EUR/USD should happen when the global economy picks up again, which may not happen before the end of the year. Until then, the EUR/USD could continue its primary downtrend or, at best, move sideways near its recent lows.
EUR/USD could continue to bounce back to $1.10 in the coming weeks
Schedule daily layers EUR / USD Made on TradingView:
From a technical analysis perspective, we can see the EUR/USD is in a clear long-term downtrend. The recovery in recent weeks has allowed the exchange rate to cross the 50-day moving average, the first since the conflict in Ukraine began, illustrating the gradual recovery of interest in the single currency.
EUR/USD formed “Marubozu” on Thursday, opening the way for a continuation of the rebound. A break above the recent high at around $1.08 would reinforce the bullish short-term outlook and pave the way for a return to $1.10.
If buying pressure continues, the EUR/USD could cross its 200-session moving average and swing around it while waiting for the start of the next global economic cycle (rebound in global manufacturing PMIs).
It is clear that the short-term bullish expectations will be nullified in the event of a pullback below the recent bottom at $1.0350. In this case, the euro could continue its decline to a parity of 1: 1 with the dollar, which is possible in the event of very bad news in Europe.