The euro-dollar pair is approaching the 11th figure level, driven by a strong upward momentum. Inflation reports released this week were not on the side of the greenback. The overall Consumer Price Index and the Producer Price Index showed a downward trend, ending in the “red zone.” At the same time, some ECB representatives voiced hawkish messages, providing additional support to the buyers of the pair.
Inflation, Fed, and ECB
So, this week the market received another confirmation that inflation in the U.S. is slowing down: the March CPI and PPI figures eloquently testify to the established trend.
At the same time, traders are confident that the Federal Reserve has not yet completed its monetary policy tightening cycle: the probability of a rate hike at the May meeting is now almost 70%. This means that the dollar is effectively losing its positions against the backdrop of strengthening hawkish expectations. At first glance, this is an abnormal behavior of the U.S. currency. But if we abstract from the May increase and assess more long-term prospects, everything falls into place.
The market is coming to understand that the Federal Reserve may begin lowering interest rates much earlier than previously assumed. While the European Central Bank is sending hawkish signals, denying the likelihood of easing monetary policy parameters within this year. The decoupling of the Fed and ECB’s courses is a powerful trump card in the hands of EUR/USD buyers.
Just today, European Central Bank representative and National Bank of Belgium Governor Pierre Wunsch stated that at the May meeting, the regulator will choose between raising the rate by 25 or 50 basis points. He added that the size of the step “largely depends on April’s core inflation.”
Last week, ECB Governing Council member Robert Holzmann also said that a 50 basis point hike in May “is still possible.” According to him, if the central bank slows down the rate hike to 25 points, the regulator will “find it difficult to go back.”
Bank of Slovenia Governor Bostjan Vasle also expressed his opinion in favor of a 50-point increase in May.
Arguments in favor of the upside trend
European Central Bank President Christine Lagarde maintains intrigue in her rhetoric regarding the further prospects of monetary policy tightening, indicating that much will depend on more recent (April) data. It is worth recalling that the overall Consumer Price Index in March came in at 6.9%, with a forecast of 7.1%. At the same time, core inflation continues to show the opposite trend. The core index, excluding food and energy prices, rose again in March – to 5.7%. Core inflation has been consistently accelerating for many months, breaking historical records. Meanwhile, the ECB head expressed concern about the dynamics of core inflation after the March meeting and in her subsequent speeches.
Given this disposition, we can assume that April inflation will determine the exact amount by which the European Central Bank will raise rates in May – by 25 or 50 points (core CPI will play the decisive role).
In any case, this decision will not be the “final chord”: The European Central Bank will continue to implement a hawkish course until core inflation is reversed. According to some estimates, the base level of inflation will reach its peak only in July, after which it will slowly decrease. Therefore, in the foreseeable future (over the next few months), the ECB will demonstrate a hawkish stance.
As for the Federal Reserve, it is approaching the end of the rate hike cycle. The May increase (which is still in question) will likely be the last within the current cycle. Moreover, recently there have been active rumors in the market that the Fed will take a step back at the end of the year, easing monetary policy. Talk about this has intensified following the recent statement by New York Fed President John Williams, who did not rule out a rate cut this year “if inflation falls.”
Conclusions
The current information background supports further growth of EUR/USD. The technical analysis also speaks in favor of the development of the upward trend: on all higher timeframes (from H4 and above), the pair is either at the top or between the middle and top lines of the Bollinger Bands indicator. On the daily chart, the Ichimoku indicator has formed one of its strongest bullish signals, the “Parade of Lines.” The nearest and, so far, the main target of the upward movement is the 1.1100 mark (the upper Bollinger Bands line on the four-hour chart).
The material has been provided by InstaForex Company – www.instaforex.com
The euro-dollar pair is approaching the 11th figure level, driven by a strong upward momentum. Inflation reports released this week were not on the side of the greenback. The overall Consumer Price Index and the Producer Price Index showed a downward trend, ending in the “red zone.” At the same time, some ECB representatives voiced hawkish messages, providing additional support to the buyers of the pair.
Inflation, Fed, and ECB
So, this week the market received another confirmation that inflation in the U.S. is slowing down: the March CPI and PPI figures eloquently testify to the established trend.
At the same time, traders are confident that the Federal Reserve has not yet completed its monetary policy tightening cycle: the probability of a rate hike at the May meeting is now almost 70%. This means that the dollar is effectively losing its positions against the backdrop of strengthening hawkish expectations. At first glance, this is an abnormal behavior of the U.S. currency. But if we abstract from the May increase and assess more long-term prospects, everything falls into place.
The market is coming to understand that the Federal Reserve may begin lowering interest rates much earlier than previously assumed. While the European Central Bank is sending hawkish signals, denying the likelihood of easing monetary policy parameters within this year. The decoupling of the Fed and ECB’s courses is a powerful trump card in the hands of EUR/USD buyers.
Just today, European Central Bank representative and National Bank of Belgium Governor Pierre Wunsch stated that at the May meeting, the regulator will choose between raising the rate by 25 or 50 basis points. He added that the size of the step “largely depends on April’s core inflation.”
Last week, ECB Governing Council member Robert Holzmann also said that a 50 basis point hike in May “is still possible.” According to him, if the central bank slows down the rate hike to 25 points, the regulator will “find it difficult to go back.”
Bank of Slovenia Governor Bostjan Vasle also expressed his opinion in favor of a 50-point increase in May.
Arguments in favor of the upside trend
European Central Bank President Christine Lagarde maintains intrigue in her rhetoric regarding the further prospects of monetary policy tightening, indicating that much will depend on more recent (April) data. It is worth recalling that the overall Consumer Price Index in March came in at 6.9%, with a forecast of 7.1%. At the same time, core inflation continues to show the opposite trend. The core index, excluding food and energy prices, rose again in March – to 5.7%. Core inflation has been consistently accelerating for many months, breaking historical records. Meanwhile, the ECB head expressed concern about the dynamics of core inflation after the March meeting and in her subsequent speeches.
Given this disposition, we can assume that April inflation will determine the exact amount by which the European Central Bank will raise rates in May – by 25 or 50 points (core CPI will play the decisive role).
In any case, this decision will not be the “final chord”: The European Central Bank will continue to implement a hawkish course until core inflation is reversed. According to some estimates, the base level of inflation will reach its peak only in July, after which it will slowly decrease. Therefore, in the foreseeable future (over the next few months), the ECB will demonstrate a hawkish stance.
As for the Federal Reserve, it is approaching the end of the rate hike cycle. The May increase (which is still in question) will likely be the last within the current cycle. Moreover, recently there have been active rumors in the market that the Fed will take a step back at the end of the year, easing monetary policy. Talk about this has intensified following the recent statement by New York Fed President John Williams, who did not rule out a rate cut this year “if inflation falls.”
Conclusions
The current information background supports further growth of EUR/USD. The technical analysis also speaks in favor of the development of the upward trend: on all higher timeframes (from H4 and above), the pair is either at the top or between the middle and top lines of the Bollinger Bands indicator. On the daily chart, the Ichimoku indicator has formed one of its strongest bullish signals, the “Parade of Lines.” The nearest and, so far, the main target of the upward movement is the 1.1100 mark (the upper Bollinger Bands line on the four-hour chart).
The material has been provided by InstaForex Company – www.instaforex.com
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