Can the ECB talk up EUR/USD at its upcoming meeting?

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EUR/USD has bounced from the May low, but can this week’s ECB meeting provide fresh upward impetus?

Source: Bloomberg

 

Forex Euro European Central Bank EUR/USD Federal Reserve Inflation

 Chris Beauchamp | Chief Market Analyst, London | Publication date: Wednesday 08 June 2022 

ECB to signal July rate hike, but will it be enough for the euro?

The European Central Bank (ECB) is the latecomer to the rate hiking party, if you exclude the Bank of Japan (BoJ), and no move from that quarter is expected for quite some time.

The Bank of England (BoE), Federal Reserve (Fed), Bank of Canada (BoC), Reserve Bank of Australia (RBA) and others have all raised rates to begin the fight against inflation. But the ECB, confronted by similar problems of high inflation and weaker growth, is also dealing with the eurozone’s proximity to the war in Ukraine.

As a result, Christine Lagarde and co have been slow to move, preferring to continue with loose policy for the time being. But the persistent rise in inflation shows no sign of abating, and with oil prices on the up again it looks to be another summer of rising prices.

More rate hikes to come

Thus, a July rate hike is likely to be telegraphed at this week’s meeting, but it is so widely expected that unless it is accompanied by plenty of hawkish commentary about a faster pace of tightening in the second half of the year, the euro may actually weaken against the dollar.

More rate hikes from August onwards are expected, but as the BoE has discovered, simply hiking rates at a steady pace is not enough when you are competing with a Federal Reserve that has been happy to talk up the pace of hikes.

Growth forecasts a risk to EUR/USD too

The bank will do its best to be fairly upbeat about the eurozone economy. But a cut to growth forecasts, to echo those of the World Bank this week, will put more pressure on EUR/USD too.

The Fed continues to talk up the US economy, which is still showing plenty of strength despite the wobble in the second quarter (Q2) gross domestic product (GDP) reading. The same cannot be said of the eurozone, where the risk of recession thanks to the Ukraine war is much higher.

Any positive benefit to EUR/USD arising from a rate hike and more hawkish commentary might well be outweighed if the growth forecasts are too gloomy.

EUR/USD struggles to make headway

EUR/USD has been steadily declining since the beginning of 2021. While the price rebounded from below $1.04 in May, it has failed to move back above the 50-day simple moving average (SMA), leaving the downtrend firmly intact.

It would take a big move back above $1.08 to suggest any kind of short-term bounce is in play, and even then the previous lower high lies close to $1.1190. Ultimately a big rally is needed to really suggest that the bounce is going to be sustained.

A post-meeting fallout for EUR/USD would see the price drop back below $1.06 that then brings the May low at $1.0350 back into view.

Source: ProRealTime