The euro has extended its gains on Tuesday. EUR/USD has broken above the 1.07 line for the first time since April 26^th.

ECB’s Lagarde sends euro soaring

The euro was red hot on Monday, as EUR/USD jumped 1.29%, its best one-day showing this year. The upswing was courtesy of ECB President Christine Lagarde, who detailed the Bank’s rate plans in a blog post. This unusual move certainly caught the attention of the markets, who gave the euro a massive thumbs-up.

Lagarde has been a strong supporter of an accommodative policy and rather dismissive about inflationary pressures. However, Lagarde has had to recalibrate as eurozone inflation continues to accelerate. The war in Ukraine has resulted in soaring oil and food prices, and there are no indications that the conflict will end anytime soon. The ECB has been sending signals that it planned to tighten policy, and Lagarde’s post confirms the shift in policy.

The ECB will embark on its rate-tightening cycle in July and will exit negative rates in September. Interestingly, the Bank will continue its QE programme, which raises the question of whether the ECB’s moves are really that aggressive. Perhaps the new stance is mostly symbolic until we see a significant increase in rates. Judging by the euro’s sharp climb, however, the markets sense that Lagarde is signalling a significant shift from the ECB.

The euro is flexing some muscle, but I would maintain that risk is tilted to the downside in the medium term. The US dollar has lost ground against most of the majors over the past few days, as fears of a US recession have escalated. Still, the Fed is committed to significant tightening in the next few months, and higher US rates should provide a boost for the greenback.

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EUR/USD Technical

• The euro is putting pressure on resistance at 1.0736. Above, 1.0820 is a multi-decade breakout line
• There is support at 1.0648 and 1.0519

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