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Market Insights

Euro in recovery mode ahead of ECB meeting

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The euro’s finally seeing some relief. EURUSD hit a low of 1.0805 before bouncing back on Tuesday into the & 1.0950 zone and ripping higher towards 1.11 on Wednesday.

We asked last week if the collapse in the single currency was overextended or justified. The market response seems to be “both”! Markets head into the ECB meeting looking for answers and perhaps the next catalyst…

Onto the chart: EURUSD one day trading view candle stick chart

EURUSD is trading way below the 20, 50 and 200 day moving averages. Most of the action since the middle of the last year has taken place within a wide descending channel. Multiple touches on both sides of the channel, plus a couple of channel breakout attempts early in 2022 that ultimately failed.

For now, bulls will be happy to see that price pushed back above the broken support level around 1.1033 & now eye 1.1120 to see if it holds as resistance. For the bears, it’s all about that 1.08 level. A break below here will encourage talk of 1.05, and even parity.

Focus on the ECB

The ECB is in uncharted waters. Inflation is finally above their elusive 2% target, but it’s not the kind of inflation they craved. Wage-driven inflation is the positive, self-sustaining dream. Unfortunately energy inflation is the dominant factor.

Wage-driven inflation tends to fuel consumption and economic growth, surging energy prices tend to weigh on overall consumption and economic activity instead. Spending is diverted away from consumption and investment to “keep the lights on”.

Flash estimates recorded headline inflation (HICP) at 5.8% in February. It’s worth nothing that energy prices aren’t the ONLY factor in play. Core inflation (which excludes more volatile items such as food and energy) is running at 2.7%, and services inflation is running at 2.5%, also well above the ECB’s target.

Are rate hikes off the table entirely?

Before the Ukraine crisis, the ECB was becoming increasingly hawkish, leading to speculation of rate hikes towards the end of the year, once the APP (Asset Purchase Program/QE) ended. This stance is now in question.

At a broad level, the tone of the meeting will be key.

Does the ECB now see a larger risk of stagflation due to high energy prices which dampens talk of tapering asset purchases? Perhaps they discuss extending the QE program further into the future?

This would effectively end the debate over rate hikes for this year, as the ECB has always guided that the first rate hike would follow shortly after the APP ends….

Or will they maintain the relatively positive outlook and talk up the potential for a sustained recovery? E.g. Energy prices will pose a risk to the outlook, but a hike towards the end of this year is still on the table…?

The answers to these questions will affect expectations and market pricing. Not long after the ECB decision, US inflation figures will be released before the focus shifts to the Federal Reserve next Wednesday (and the USD side of the currency pair).

Not investment advice. Past performance does not guarantee or predict future performance.

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