ECB Hikes Rates Amidst Inflation Pressures
Lagarde Lifts Rates
EURUSD is higher today on the back of the latest ECB meeting yesterday. The bank raised rates a further .25% in line with expectations, while signalling the likelihood of further tightening to come amidst ongoing inflation risks linked to the Iran war. The move was well telegraphed and so the bigger focus was on the bank’s forward guidance. ECB chief Lagarde note that inflationary pressures were broadening and was keen to downplay the idea of the hike being an ‘insurance rate hike’. This suggests that the bank Is not in a ‘one and one’ mindset here and further tightening looks likely as a result. Traders had been pricing in roughly .75% of tightening this year and for now at least it seems that the ECB is keeping this outlook alive, hence the rally we’ve seen in EUR.
Forward Guidance
However, the ECB was clearly keen to avoid over egging its hawkish outlook, referring to a data dependent stance and taking things on a meeting-by-meeting basis. As such, Lagarde was able to avoid any excessive strengthening in EUR. For now, a follow-up cut in July looks 50/50 and will likely depend on what happens between the US and Iran and, consequently, oil prices. Oil is falling today on the back of Trump’s claims that the war is over and a deal is imminent. If this proves true and a deal is announced, oil prices could come off sharply, creating a big shift in the inflation outlook this year and likely keeping the bank on hold next month. If a deal doesn’t materialise however and oil prices rise again, a follow-up hike next month looks more reasonable again.
Technical Views
EURUSD
The sell off has stalled for now into the bull trend line off last year’s lows, underpinned by structural support just below at 1.1490. Bulls will be looking to get back above 1.16 near-term to help alleviate downside risks and turn the focus back towards 1.1756. If we do break lower again, however, 1.1404 is the next support to note.
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