It’s decision day at the European central bank. In the wake of rising inflation at a record pace, ECB President Christine Lagarde and her colleagues will end asset purchases and pave the way for exiting eight years of negative interest rates. Traders expect a first ECB rate hike to come as soon as July. Normally rate hike projections are positive for the respective currency, so the euro would rise. The problem is that the market has already priced in an aggressive hawkish outlook, which is why less-hawkish rate hike expectations could even send the euro lower.
The key issue is: Is the ECB pressured to hike 50bp even sooner rather than later? Market speculations have often gone too far too fast which is why we see potential for disappointment and thus, a falling euro.
Traders have priced in 37.5 basis points of tightening by next month, implying a 50 percent chance of a 50bp rate hike.
The most likely scenario however, is a cautious exit strategy and smaller rate increases in July and September.
The ECB rate decision is due at 11:45 GMT followed by the press conference 45 minutes later.
Bullish breakout: Bulls will wait for prices above 1.0760 in order to buy euros towards 1.08. A sustained break above 1.0810 could see further gains toward 1.09.
Bearish breakout: A break below 1.0670 and further 1.0640 could ignite bearish momentum towards 1.06. Below 1.0580, the euro could even fall towards 1.05.
We wish you good trades!
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