Forex Markets Driven by Rate Hike Expectations on Both Sides of the Pond
The ECB Makes a Hawkish Turn, Overshadowing a Stellar NFP Report
by Bogdan Giulvezan
During Thursday’s meeting, the European Central Bank made it crystal clear that some changes are underway, fuelling speculation that 2022 will be the year of the first rate hike since 2011.
According to the ECB, “inflation is likely to remain elevated for longer than previously expected” and furthermore, the bank acknowledged that it has to adjust its instruments “as appropriate, to ensure that inflation stabilises at its two per cent target over the medium term”
ECB President Lagarde also pledged to “take the right steps at the right time” and all this boosted the single currency, due to the assumption that a rate hike will come sooner than expected, possibly in 2022.
The hawkish turn made last week by the ECB ‘nullified’ the effects of the surprisingly good NFP report that showed 467K new jobs in the U.S. as opposed to the expected 110K. However, the positive impact of the NFP is likely to trigger USD gains sooner or later.
Key Events for the Week Ahead
Monday at 3:45 pm GMT, ECB President Christine Lagarde will testify before the European Parliament Economic and Monetary Affairs Committee in an online meeting. The impact is uncertain but any mention of inflation or the interest rate will likely trigger volatility.
Thursday, February 10 at 10:00 am GMT, the European Commission will publish the Economic Forecast, which contains an assessment of the economic performance and projected trends for the next 2 years. The impact on EUR pairs will depend on the contents of the document but this is another release that traders should keep an eye on.
Maybe the most important event of the week will be the release of the U.S. inflation figures, scheduled for the same day, Thursday at 1:30 pm GMT. The Consumer Price Index is expected to show a 0.4% change (previous 0.5%), while the Core CPI is predicted to change 0.5% (previous 0.6%).
The FOMC tends to pay more attention to the Core version because it excludes food and energy from the calculation (these tend to be more volatile, thus distorting the reading). A higher-than-expected reading for any version of the CPI would increase speculation about a rate hike in March and would possibly boost the greenback.
Technical Outlook – EUR/USD
Last week the diagonal channel showed its strength once again and perfectly rejected falling prices, sending the pair above the 50 days MA. Of course, the rally was also fuelled by the fundamental reasons outlined above, not only by technical factors.
The Euro bulls failed to touch 1.1500 resistance and only reached 1.1483 but the pair is now out of the long-term diagonal channel, which may spur additional buying. However, unless we see a Daily close above 1.1430, the US Dollar is likely to erase some (if not most) of the losses; after all, let’s not forget that the NFP came out much better than expected and this is likely to boost the currency.
