Lagarde signals a rate hike

ECB President Christine Lagarde spoke today at an event sponsored by the Slovenia Central Bank, but what was of most interest were her remarks on future rate hikes. The ECB remains in dovish mode, but with inflation hitting 7.5% in the eurozone, the ECB will be tightening the monetary screws. More ECB members are publicly urging the central bank to raise rates and in her speech, Lagarde appeared to heed these calls, in her clearest signal yet that a rate hike is coming later in the year.

Lagarde stated that the ECB will end asset purchases under its QE programme, likely in Q3. This will be followed by a rate hike “some time” later. She acknowledged that “some time” was imprecise but added that it could be as little as several weeks. Lagarde added that the normalisation process would be “gradual”, which means investors shouldn’t expect an aggressive rate-hike cycle such as we’re seeing with the Fed and the BoE.

US inflation next

All eyes are on the US inflation report for April. Headline CPI is expected to drop from 8.50% to 8.1%, and Core CPI is forecast to fall from 6.50% to 6.0%. The inflation report is likely to produce a binary outcome. If inflation does drop significantly, as expected, we will see headlines trumpeting that inflation has peaked, and the US dollar will likely lose ground. Conversely, higher numbers than expected will lead to expectations of faster Fed tightening and should give the dollar a boost.

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EUR/USD Technical

• 1.0557 remains a weak resistance line, followed by resistance at 1.0632
• There is support at 1.0473 and 1.0398

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