Euro Steadies After Strong Boost From Hawkish ECB

EUR/USD news and analysis

• EUR/USD It’s still close to a five-week high
• The European Central Bank’s prediction that interest rates will rise again in July has supported him
• However, the gains have been quick and the European Central Bank is not the only central bank raising interest rates

EUR/USD Still Close to Five-Week Highs, Upward Revisions to Inflation Expectations

The Euro stabilized on Friday but still looked set to end the week higher thanks to the European Central Bank, which raised key lending rates again on Thursday.

The decision was widely expected given stubborn inflation in the eurozone, and European Central Bank President Christine Lagarde also predicted that interest rates are likely to rise again early next month. Her assessment that inflation has been “too high for too long” in the currency bloc, as elsewhere, is widely shared. Upward revisions to the ECB’s inflation forecast underlined her point. Thursday’s updated forecast showed prices rising year-on-year to 5.4% this year, up 0.1 percentage point from the March forecast. Forecasts for the next two years have been revised up by the same amount.

The EUR/USD pair rose to a five-week high after the decision, but was unable to move forward in the Asian and European trading sessions on Friday. However, there remains a clear divergence at the moment between the European Central Bank, which continues to tighten monetary policy aggressively, and the US Federal Reserve, which has chosen to pause a long series of interest rate increases to measure their effects, although it expects balanced to have to continue raise them at the right time.

It can be argued, of course, that the Fed was far ahead of the anti-inflation curve than the European Central Bank, and that its monetary policy was more effective. But anyway, the euro is reaping a huge boost from the prospect of higher interest rates at the moment.

It should be noted that the markets are very close to pricing in another rate hike in the US next month, so the EUR bulls will need to be careful as the economic data pours in. There are some things this afternoon, in the form of the University of Michigan’s esteemed and closely watched Consumer Sentiment Survey. However, this may not be enough in itself to detract from the bumper Euro week.

Technical analysis of the EUR/USD pair

The graph has been compiled using the trading view

EUR/USD’s rally on Thursday lifted it above an already sharply rising uptrend line, off the lows of June 7th and pushed it back into a trading range bounded by the low of May 11th at 1.09124 and the closing high of May 3rd at 1.09124. 1.10613. The latter was the peak of nearly fifteen months.

There is clearly some possibility that the bulls have gotten a bit ahead of themselves, both technically and perhaps on a fundamental basis. However, it will be interesting to see if the EUR can stay in this range until the end of this week. If at all possible, the bulls may build a firm enough base to see those recent highs challenged again, possibly next week.

There is obvious psychological support at the 1.09 handle, but that is very close to the current market. Below that, there should be supports in the 1.0860 area from May 15-17, and if it declines, trend line support at 1.08214.

IG’s sentiment finds that traders are a little wary of further gains from here, with 63% of them being net short. This may not indicate something more serious than possible overbought, which RSI will influence. But the noncommittal might want to wait a while and see if this week’s gains hold.

– By David Cottle for DailyFX