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Record inflation and ECB rates » What is the impact of the euro on forex?

Will record inflation and a possible ECB rate hike support the euro?

It looks like the European Central Bank’s rate hike in July is firmly on the table and negative rates will soon be a thing of the past. What impact will the euro have on forex?

This morning, the Eurozone consumer price index was revised down, but this will not change anything, as inflation at 7.4% is still at a record high. We have been hearing a lot of hawkish remarks lately from various European Central Bank officials, and it is likely that they will only intensify. So, will we see the EUR/USD pair form a base around 1.05 and move higher in forex instead of falling to parity?

More militant rhetoric from ECB politicians

Ollie Rehn was the latest to be hawkish this morning, saying rates should move out of negative territory relatively quickly. Ren said the need to continue the gradual process of monetary policy normalization was partly due to increased uncertainty about future price developments, effectively admitting, like his colleagues, that their forecasts were wrong. Ren already made some hawkish remarks earlier this month, so this is nothing new.

Pablo Hernandez de Cos, another ECB politician, backed Olli Rehn by calling for the gradual removal of stimulus measures, which is “adequate” in the current context. He added that further rate increases could be made in the coming quarters.

Thus, it looks like the July rate hike is firmly on the table and negative rates will soon be a thing of the past. The only problem is that the economy is going through a testing period, and the ECB will have to be very careful trying to balance the risks to growth associated with a slight tightening of monetary policy. But the fight against inflation is real and they simply can’t let the pressure on prices rise further or stay high for long.

Knot pushes the idea of ​​a 50 basis point rate hike

The euro received forex support on Monday after Governing Council member Klaas Knot said the ECB is expected to raise interest rates by 25 basis points in July, but a 50 basis point hike should not be ruled out if the data points to rising inflation. .

While I don’t think we’ll see a 50 basis point rise, Knot’s comments show that the ECB is determined to start fighting inflation. Markets seem to agree with the ECB raising rates by around 105 basis points by the end of 2022.

EUR/USD gives bulls hope

Source: StoneX and TradingView.

Thanks to the ECB’s hawkish statements of late, EUR/USD has risen again above former support at 1.0470-1.0500. A retest of this area from below should have offered some resistance on Monday. However, it is not. The question arises, are the bears caught by a group of speculators? If so, we could see a move to a recent high above 1.0640 where I believe the buy stops are definitely resting. Incidentally, a move north of 1.0640 would also push rates above the March 2020 low, creating potential long-term decline.

However, if rates come back down and break the aforementioned support zone below 1.0470, then all bets are off again. This would be bearish and a drop to the January 2017 low at 1.0340 would not surprise me.

Text: Fawad Razaqzada, FOREX.com » Official site

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Disclaimer: The information and opinions contained in this report are for general information only and do not constitute an offer or solicitation to buy or sell any currency contracts or CFDs. Although the information contained herein has been obtained from sources believed to be reliable, the author does not warrant its accuracy or completeness and shall not be liable for any direct, indirect or consequential damages that may result from anyone relying on such information.

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