EUR/USD Cautious after Ms Lagarde’s Hawkish Comments & Ahead of the Fed’s Decision

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EUR/USD Analysis

The European Central bank hiked rates for the first time in eleven years on Thursday, with the bold 50 basis points lift-off, exceeding the previously communicated plan for a reserved 0.25% move. [1]

The bank expects more tightening ahead, but Ms Lagarde threw the September forward guidance out of the window, saying that this is "no longer applicable". She added that Thursday's outsized hike does not change the "ultimate point of arrival" and that "we are accelerating the exit", in what appeared a dovish press conference.

Over the weekend however, she seemed to offer a Fed-like commitment to fighting inflation, writing that the bank will keep raising rates "for as long as necessary" in order to bring inflation down. [2]

This was a far more hawkish reference, compared to the "further normalisation of interest rates will be appropriate" on Thursday's policy statement, but it is still far from a "whatever it takes approach".

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Markets now focus on the Fed's decision on Wednesday, as the policy differential will likely be the ultimate decider of the EUR/USD trajectory.

The US Central bank is much more aggressive as it has already delivered 150 basis points worth of rate hikes and has pointed to an 0.5%-0.75% move, while its intentions around the next meeting in September will be a crucial focal point.

The Fed's aggressiveness however may have peaked, since if it does not break away from its guidance in order to deliver a bolder full percentage point increase, it will likely be even harder to so in the future.

EUR/USD has been consolidating its rebound over the last few days and trades with caution today and may struggle for firm direction ahead the Fed's decision.

The recent rebound has given the common currency the opportunity to push for the 1.0315-50 region, but will need a catalyst for that. A break above this level could potentially fuel a recovery towards 1.0487, although from that level on the technical landscape is unfriendly and we are cautious around its ascending prospects.

Despite last week's gains EUR/USD is in a precarious position and we can see renewed pressure to 1.0072 and another breach of parity, but 0.9856 seems far in the near term.

Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 25 Jul 2022 https://www.ecb.europa.eu/press/pr/date/2022/html/ecb.mp220721~53e5bdd317.en.html

2

Retrieved 10 Dec 2022 https://www.ecb.europa.eu/press/blog/date/2022/html/ecb.blog220723~c2b1d4b654.en.html

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