Relevance up to 12:00 2022-06-22 UTC+2 Company does not offer investment advice and the analysis performed does not guarantee results. The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
Against the backdrop of an almost empty economic calendar, the euro-dollar pair is slowly moving towards the 6th figure, currently testing the resistance level of 1.0570 (the lower boundary of the Kumo cloud, coinciding with the Tenkan-sen and Kijun-sen lines on the daily chart). Yesterday's attempt to grow ended in failure: sellers became more active, dragging the price to the bottom of the 5th figure. Today there are revanchist sentiments for the pair—which is again creeping towards the borders of the sixth price level.
The euro was supported yesterday by European Central Bank President Christine Lagarde. During her speech at one of the committees of the European Parliament, Lagarde commented on the current situation and assessed the prospects for tightening monetary policy. On the one hand, she didn't say anything sensationally new. But on the other hand, her rhetoric was quite hawkish, thanks to which EUR/USD buyers were able to resume the corrective offensive.
First of all, Lagarde explained why the economists of the central bank were wrong in their forecasts regarding the growth of inflation in the eurozone. Even an internal investigation was carried out to clarify all the circumstances. According to the head of the ECB, the main reason was related to incorrect expectations for energy prices. Lagarde acknowledged that the central bank specialists "underestimated certain factors that had a significant impact on inflation."
It is noteworthy that the European Central Bank became the first among the central banks of the leading countries of the world to conduct such an internal investigation. This suggests that the current inflation growth came as a complete surprise to the members of the regulator. Therefore, the ECB must respond to the current situation in an appropriate manner, demonstrating its determination.
Lagarde repeated her earlier theses yesterday. She confirmed that the European regulator plans to raise the rate by 0.25% following the results of the July meeting, but at the same time made it clear that the September increase is still an unresolved issue. According to her, the ECB may raise its interest rates again in September "if the situation requires it."
Note that after the publication of the May inflation report (which reflected the growth of the general CPI in the eurozone up to 8.1% and the core index up to 3.8%), many experts revised their forecasts regarding the further actions of the ECB. For example, Deutsche Bank previously forecast two rate hikes (in July and September) in increments of 25 basis points. But in early June, the bank updated its forecasts: according to currency strategists, the European regulator at one of the above meetings will raise the rate by 50 basis points, at the other by 25. As a result, the deposit rate will increase in September to 0.25%.
Such forecasts coincide with the opinion of ECB policymaker Olli Rehn. Today, he said that the September rate hike "is very likely to exceed 25 basis points." Recall that earlier, the governor of the Central Bank of Slovakia, Peter Kazimir, said in an interview that he expected a rate increase of 25 basis points following the results of the July meeting, but at the same time, he was "open to discussion" on the issue of increasing the rate by 50 points in September. In addition, another representative of the ECB Governing Council, Robert Holzmann, also expressed the opinion that the regulator will need a 50-point increase at one of the next meetings.
Today's statement by Rehn allowed EUR/USD buyers to test the resistance level of 1.0570. The head of the ECB, in turn, did not deny the September rate hike, so her position was also interpreted in favor of the euro. As a result, the corrective growth of EUR/USD has continued: the price is gradually moving towards the 6th figure.
In my opinion, longs at the moment look risky, because tomorrow the head of the US Federal Reserve, Jerome Powell, will come to the forefront of the US Congress, who will announce the semi-annual report and answer questions from congressmen. It is likely that the head of the Fed will admit the possibility of a 75-point rate hike not only at the July meeting, but also at the September one. In this case, the greenback will "spread its wings" again and regain lost positions. Given his rhetoric following the results of the June meeting, it can be assumed that he will also demonstrate his determination within the walls of Congress. After all, one should not forget that a 40-year inflation record is a "headache" not only of an economic but also of a political nature. Therefore, decisive action is expected from Powell.
As for the ECB, on the one hand, it is obvious that the regulator seeks to regain control over prices, repaying the abrupt inflation growth. On the other hand, the central bank should not provoke a panic in the bond markets of the most vulnerable EU countries. That is, on one side of the scale, the fight against inflation, and on the other, the risk of recession. The central bank is forced to maneuver "between the raindrops," excluding the most radical scenarios. Therefore, in my opinion, the majority of ECB representatives will in one form or another repeat the position of Lagarde, who yesterday confidently announced a 25-point rate hike in July, but at the same time raised a question mark regarding September prospects.
Thus, taking into account the existing fundamental background, the EUR/USD pair is able to "crawl" to the borders of the 6th figure, however, further price growth will depend on the rhetoric of Jerome Powell, who will start voicing the semi-annual report in Congress tomorrow. Given the high degree of uncertainty, at the moment it is advisable to take a wait-and-see position on the pair.