Euro Forecast (EUR/USD) – It’s time for the ECB to seize the nettle
EUR/USD Price, Chart and Analysis
- The ECB rate hike and details of the anti-fragmentation tool are awaited.
- Italian political instability and Nord Stream reopening fears.
The European Central Bank (ECB) will start raising interest rates this week in a bid to stem runaway inflation and will give the market more details on its anti-fragmentation scheme in a bid to quell any surges in the market. bond. The ECB is behind most other central banks in monetary tightening, a situation that is visible in the common currency’s weakness in the foreign exchange market.
The ECB is expected to raise interest rates by 25 basis points on Thursday, the first hike since April 2011, taking the deposit rate from -0.50% to -0.25%. The deposit rate has been in negative territory since June 2014. While next week’s hike was well heralded by the central bank, financial markets want more and are currently pricing in rate hikes of around 35 basis points. With eurozone annual inflation currently at 8.6%, a bigger than expected hike may be needed.
The ECB will also give more details on its anti-fragmentation facility, a tool that will be used to prevent eurozone bond yields from rising too quickly. This facility is expected to be unlimited – in an effort to put bond vigilantes on notice – and will have a flexible framework to allow the central bank to step in and buy bonds when it sees fit. Italian bond yields have risen sharply in recent months – widening their yield differential with comparable German Bunds – and the ECB will want to keep Italian borrowing costs under control in order to stimulate economic growth. This new facility may seek to sterilize interventions by selling low yield/high quality bonds from Germany and Austria, for example to buy bonds from highly indebted countries, such as Italy.
And Italy is making headlines for a different reason as Prime Minister Mario Draghi offered his resignation to the president on Thursday. Italian President Sergio Mattarella rejected his Prime Minister’s resignation and asked him to continue talks in the Senate. Prime Minister Draghi tendered his resignation after the 5 Star Party, his biggest coalition partner, withdrew its support for a new cost-of-living assistance package. If Prime Minister Draghi steps down, Italian bond yields will rise on heightened political uncertainty, just as the ECB seeks to mitigate higher borrowing costs.
Europe’s energy crisis could escalate next week if Russia refuses to reopen the Nord Stream 1 gas pipeline it closed on Monday for a week of maintenance. Nord Stream 1 is the main gas pipeline between Russia and Germany and any delay in reopening will intensify the energy crisis gripping Europe at the moment.
For all economic news and events affecting the market, see the DailyFX Calendar
This week, the EUR/USD finally traded at parity after breaking through an important support level earlier in the month. The pair’s selloff has been consistent and with little technical support, EUR/USD could fall back and stay below 1000 in the days and weeks ahead.
EUR/USD monthly price chart July 15, 2022
Retail merchant data shows71.46% of traders are net long with a ratio of long to short traders of 2.50 to 1. The number of net-long traders is 6.38% lower than yesterday and 2.89% higher than last week, while the number of net-short traders is 14.48% higher than yesterday. yesterday and 25.37% higher than last week.
We generally take a contrarian view of crowd sentiment, and the fact that traders are net buyers suggests that EUR/USD prices may continue to decline.Still, traders are less net long than yesterday and compared to last week. Recent shifts in sentiment warn that the current The EUR/USD price trend may soon reverse higher despite traders staying sharp.
What is your opinion on the EURO – bullish or bearish?? You can let us know via the form at the end of this article or you can contact the author via Twitter @nickcawley1.