Since trading began this week, the price of the EUR/USD currency pair has been cautiously waiting until a policy update from the European Central Bank is announced. In addition, we are also awaiting the US inflation figures which will be announced on Friday. These events will chart the course of the currency pair’s movements in the coming days.
Before these events, the price of the euro against the dollar EUR/USD stabilizes around the level of 1.0740. Markets are eagerly awaiting the next date of the European Central Bank’s latest interest rate hike. Bank of America warns that the European Central Bank will raise its main deposit rate to well above 0% before the end of the year, but this risks increasing retail risks in the euro zone.
In a new research note, Bank of America says it now expects a cumulative rate hike of 150 basis points this year, 50 basis points higher than their previous assumptions. They see big moves of 50 basis points in July and September, which is more optimistic than the market consensus which currently anticipates a more cautious movement of 25 basis points in July.
Commenting on this, Ruben Segura Caiwela, European Economist at Bank of America Europe in Madrid, says: “Our call was already more hawkish than the consensus, it is even more powerful now.” “We can’t see the ECB avoiding moving 50 basis points by September at the latest.” Such a surprise could initially boost euro exchange rates, but “we remain concerned that it is going too fast”, and in fact the team of economists at Bank of America describes itself as ” confronting a hawkish appeal to the European Central Bank” came in a recent note comes days before the European Central Bank’s June policy update, due on Thursday.
The policy update should see the ECB confirm the end of its quantitative easing program with the first rate hike confirmed in July. But a rush to tackle inflation could mean the risks of a fragmented eurozone are growing rapidly, “with Italy in the spotlight”.
“To be absolutely clear, we still don’t understand the impulse from the ECB,” the analyst added. no matter how the economy is supposed to manage neutral rates when it is so far from equilibrium. Therefore, we expect the economy to shut down the central bank after all these hikes this year.
However, the logic of various members of the Board of Governors of the European Central Bank has recently been adopted by Bank of America, including Chairman Christine Lagarde. The ECB has made it clear that it wants to be seen as acting against inflation and to be proactive against the risks of second-round effects. Eurozone inflation was 8.1% in May 2022, down from 7.4% in April 2022.
Bank of America fears that a rapid rise in interest rates could put undue upward pressure on so-called peripheral eurozone countries such as Greece and Italy. They are already paying more than countries like Germany and France on their sovereign debt, and higher interest rates from the European Central Bank will inevitably increase their funding costs.
The danger is that the rising financing costs of these countries will become disorganized and trigger a new crisis.
Additionally, the analyst says markets aren’t thinking enough about the prospects of a eurozone recession, and “we feel recession risks are more easily recognized in the US than in the eurozone.” “.
What is the solution to the puzzle facing the eurozone economy?
More financial support is the solution suggested by Segura Caiwela. “Headwinds are coming from all sides, and fiscal policy, at the moment, is doing very little to compensate.” Accordingly, Bank of America suggests that a more cautious approach to fiscal policy tools may prevail, in anticipation of higher funding costs due to monetary tightening. Meanwhile, a change in the economic landscape will force the European Central Bank to rein in its ambition to raise interest rates in 2023.
According to the pair’s technical analysis: We expect choppy moves for the EUR/USD currency pair today, awaiting the announcement of the European Central Bank’s policy update. We focus particularly on the tone of his statement and on statements by ECB Governor Lagarde. Any indication of a strong policy tightening trajectory will support further gains for the Euro against the Dollar, and the closest ones will be 1.0785 and 1.0880, and the last level is important to expect psychological resistance from 1.1000, respectively.
If cautious to tighten the bank’s policy, this will give the US Dollar an opportunity to rally, and thus breaking the support at 1.0630 will cause the bears to move sharply lower, as is the case with the general trend of the currency pair.