EUR/USD Price Action Set-Up on the ECB's Latest

As a reminder, the ECB increased its hawkishness at its previous meeting, having opened the door to earlier termination of net asset purchases. This was accomplished by establishing a monthly bond schedule of EUR 40 billion in April, EUR 30 billion in May, and EUR 20 billion in June. In turn, this would be the first port of call for determining whether the ECB is becoming more hawkish, as would be the case if the bond program is accelerated. A program of EUR 40 billion in April and EUR 20 billion in May, for example, would clearly pave the way for a Q3 rate hike.

Additionally, the ECB abandoned its vow to stop net asset purchases "shortly" before a rate hike, opting instead for "some time later," which ECB Managing Director Christine Lagarde indicated may be weeks or months in order to maintain flexibility. As a result, additional modification to the sequencing instructions will be closely monitored.

However, it is critical to remember that the previous ECB meeting occurred at the start of the Russia-Ukraine war. As a result of the additional time to digest the potential impact, the concern of stagflation in the Euro Zone has grown, which may prompt the ECB to adopt a more cautious attitude. Keep in mind that only last week, source reports indicated that the ECB is developing a crisis weapon to deploy if bond yields spike, more precisely peripheral spreads. Additionally, they claimed that the bank had not yet determined whether the backstop would be revealed pre-emptively. While this is still in the design stage by staff, this does not strike me as a ringing endorsement for another hawkish tilt. As a result, the scenario has been set for today's meeting to be disappointing for hawks.

What Is Included in the Price?

At the moment, money markets anticipate the ECB will end NIRP by year's end. As indicated previously, and in contrast to the Fed, the ECB's monetary tightening is less certain in the current environment of mounting stagflation concerns. While the Russia-Ukraine conflict has worsened inflation pressures, growth risks have also shifted to the negative, putting the ECB on a tightrope in terms of normalising policy while avoiding a hard landing.

Reaction of the Market

The Euro has recovered from 1.08 to retake 1.09 in the previous 24 hours, indicating that some traders are bracing for another hawkish surprise. This does, however, expose the Euro to a pullback if the statement remains intact. The implied move for EUR/USD is 54pips, according to the options market. On the upside, resistance is located at 1.0950-70, which corresponds to the pair's recent collapse following Fed Brainard's hawkish statement, and 1.1000 above. In the meantime, support is located at 1.08.

EUR/USD Exchange Rate Chart