Euro Steadies After Strong Boost From Hawkish ECB

EUR/USD News and Analysis

• EUR/USD remains close to five-week highs
• The ECB’s prognosis that rates will likely rise again in July has underpinned it
• Still, gains have been fast and the ECB isn’t the only central bank raising rates

EUR/USD remains close to five-week highs, upward revisions on inflation outlook

The Euro steadied on Friday but still looks set to end the week on a high note thanks to the European Central Bank, which raised its key lending rates once again on Thursday.

The decision had been widely expected given the stubbornness of Eurozone inflation, as indeed was ECB President Christine Lagarde’s prediction that rates will likely rise again as early as next month. Her assessment that inflation has been ‘too high for too long’ in the currency bloc, as elsewhere, is broadly shared. Upward revisions to the ECB’ s inflation forecasts underlined her point. Thursday’s updated projections showed annualized price rise reaching 5.4% this year, up 0.1 percentage points from the March forecasts. Expectations for the next two years were revised upward by the same amount.

EUR/USD surged to five-week highs after the decision, but hasn’t managed to push on much further in Friday’s Asian and European trading sessions. Still, there is for now a clear contrast between the ECB, still tightening monetary policy quite aggressively, and the US Federal Reserve which has opted to pause its own long series of rate hikes to gauge their effects, even though it expects on balance to have to keep raising them in due course.

It’s arguable of course that the Fed has been further ahead of the inflation fighting curve than the ECB, and that its monetary policy has been more effective. But in any case the Euro is reaping considerable support from the prospect of higher rates for now.

It’s worth noting though that markets are very close to pricing in another US interest rate increase next month, so Euro bulls will need to be wary as the economic data trickle in. There’s some this afternoon, in the form of the University of Michigan’s venerable and closely watched consumer sentiment survey. That might not be enough on its own to dent the Euro’s bumper week, however.

EUR/USD Technical Analysis

Chart Compiled Using Trading View

EUR/USD’s Thursday surge has taken it further above an already steeply rising uptrend line, from the lows of June &7 and has pushed it back into a trading band bounded by May 11’s closing low of 1.09124 and May 3’s closing high of 1.10613. The latter was a near fifteen-month peak.

Clearly there’s some chance that the bulls have got a little ahead of themselves, both on a technical and perhaps a fundamental basis. However it will be interesting to see whether the Euro can remain in this band into the end of this week. If it can, bulls may be building a sufficiently firm base to see those recent highs challenged again, possibly next week.

There’s clear psychological support at the 1.09 handle, but that’s very close to the current market. Below that there should be props in the 1.0860 region from May 15-17 and, if they give way, trendline support at 1.08214.

IG’s own sentiment index finds traders a little wary of further gains from here, with 63% of them net short. This may indicate nothing more serious than some likely overbuying, which Relative Strength Indicators would bear out. But the uncommitted may want to wait a while and see whether this week’s gains hold.

–By David Cottle for DailyFX