Market Overview

19 July 2022

ECB Could Hardly Surprise Markets

The European Central Bank (ECB) will announce its monetary policy decision t on July 21, ahead of the Federal Reserve (Fed) that will have its meeting on July 27. The timing may affect the ECB’s decision, but it may be even more intriguing to see how far both regulators are willing to go.

The ECB has to raise interest rates, and it may be the case of the higher the better as it is lagging behind the Fed’s monitoring hiking attempts to combat inflation. Consumer prices in Europe jumped from 2.2% year-on-year in July 2021 to 8.6% now. The Euro has declined dramatically when paired with the U.S. Dollar, which should also be considered when forecasting the ECB’s moves, as Europe imports inflation when buying energy and other imported commodities. However, the ECB may find such tightening measures as burdens as Europe is facing high risks of a recession and the South European countries are also going up against a debt crisis. Thus, the decision may be simple, only raise interest rates by 25 basis points and let the Fed act for the ECB and lead the way forward.

Indeed, the Fed is unlikely to strengthen the Greenback further as investors have exaggerated expectations of what the Fed’s actions may be, and these are already priced in. After a stunning June inflation at 9.1% year-on-year for the first time in 41 years, investors expect the Fed to raise interest rates by 100 basis points, or at least by 75 basis points during its meeting next week. If the Fed does go big, interest rates may be lifted to 2.75%, making it the largest hike in 30 years. Again, even this unprecedented move is already priced in, so the Dollar may be corrected after the Fed’s decision. In this scenario, the ECB may only have to wait for the Fed to do all the work for it. Moreover, the European watchdog would not have to produce elevated recession risks.

Such expectations are pushing EURUSD to 1.0250, and technically this could continue to move it to  1.0280. If this resistance level is broken the Euro may rise towards 1.0360. But this would be a change of the trend to the upside, which is unlikely now. The single currency is heavily pressured by the energy crisis and soaring inflation. So, any upside spikes could rather signal an interesting sell opportunity towards 1.0000, and further down to 0.9800-0.9900.

 

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Mark Goichmann
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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