ECB saves euro. Forecast as of 25.05.2022

Verbal interventions of Christine Lagarde and her fellow central bankers sent the EURUSD up from its five-year low, and investors don’t expect the parity in the near future. What’s next? Let us discuss the Forex outlook and make up a trading plan.

Weekly euro fundamental forecast

Hawkish speeches of the ECB policymakers averted the parity of the euro and the US dollar. Lagarde made it clear that the QE will end soon, and the interest rate will exit sub-zero territory by the end of September. The EURUSD surged above 1.07, as other ECB officials also sounded hawkish.

The president of the Dutch central bank Klaas Knot suggested a deposit rate hike by 50 basis points at one of the Governing Council meetings. He was joined by the Latvian central bank chief Martins Kazaks, who said that the ECB should consider raising interest rates by half a percentage point. The Governor of Austria’s central bank Robert Holzmann suggests a step of 50 basis points would be “appropriate” in July.

Of course, such a stance supports the EURUSD rally. However, the ECB will hardly tighten monetary policy that aggressively. The French Governor Villeroy de Galhau said that a 50bps rate hike isn’t yet consensus at the Bank. Christine Lagarde believes that in an environment where the cause of high inflation is supply, not demand, the European Central Bank has no reason to hurry.

Anyway, verbal interventions convinced investors of the ECB’s aggressive monetary restriction. Money markets expect the deposit rate to reach 110 basis points by the end of 2022. Commerzbank predicts that the rate will rise to 1.25% by April 2023, the spread between the US and German bond yields is shrinking to its lowest level since the beginning of March, and the EURUSD is growing.

Dynamics of EURUSD and US-German yield spread


Source: Bloomberg

The euro bulls are also supported because earlier investors were worried only about the Fed’s aggressive monetary tightening, and now they have much more reasons to worry. Poor corporate reporting, weaker US domestic data, including the PMI drop to its four-month low, and negative housing market performance. Furthermore, the expectations of a recession send the S&P 500 down to the bear market territory and push up the demand for Treasuries. A drop in Treasury yields holds back the EURUSD bears.

Investors are wondering about a reason for a pause in the Fed’s monetary tightening, suggested by Raphael Bostic. Will it be a slowdown in inflation or in the economy?

Weekly EURUSD trading plan

I suppose markets have changed their expectations for the Fed’s monetary restriction speed. In addition to the expectations of the ECB rate hike, this fact supports the EURUSD rally. The euro seems to be rising too fast. However, if the price won’t drop to the range of 1.046 – 1.066, the correction will continue.

Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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