Drake Hampton
Apr 14, 2022 10:28
Tomorrow, the European Central Bank will release its April monetary policy statement. While no interest rate adjustment or fresh macroeconomic projections are anticipated at this meeting, this does not mean the gathering will be boring; on the contrary, the gathering may generate significant volatility, notably for the euro. Traders should pay close attention to policymakers' assessments of the economic outlook, as well as their recommendations on future measures, particularly any comments on asset purchases in light of quickly shifting market conditions.
After years of battling to keep inflation below the 2% objective, the picture shifted substantially in the aftermath of the pandemic, and even more dramatically in recent months following Russia's invasion of Ukraine. Now, the ECB is confronted with the inverse situation: soaring inflationary pressures; indeed, the euro area's headline CPI hit a record high of 7.5 percent last month amid soaring energy costs, raising concerns that the institution is falling behind the curve in its fight to restore price stability.
Although some central bank members appear to be eager to unwind stimulus more aggressively and have echoed this sentiment, it is unlikely that President Christine Lagarde will deliver any major surprises, particularly given that downside risks to the growth profile have increased and now threaten to tip the economy into recession.
Lagarde, on the other hand, might modify recent communications and indicate that the asset purchase program could finish early in the third quarter, as opposed to the previous imprecise judgment that the bond-buying scheme will end sometime in the third quarter.
While the progressively hawkish message is not a significant divergence from prior pronouncements, it may help solidify expectations for the first interest rate hike in September, a scenario that might trigger a temporary bull run in the euro. That said, there is some room for EUR/USD strength in the coming days, but not for sustained gains, as the Fed's significant monetary policy divergence from the ECB continues to act as a tailwind for the US currency.
Technical Analysis of the EUR/USD
EUR/USD appears to be recovering from a crucial support level near the psychological 1.0800 level ahead of the ECB announcement (EUR/USD is up 0.37 percent to 1.0879 at the time of this writing). If the pair continues its upward movement in the coming sessions, initial resistance is seen near 1.0950. If this ceiling is breached, purchasing interest may increase, clearing the way for a probable advance towards 1.1135. If, on the other hand, the sellers return and push the exchange rate lower, 1.0800 appears to be a support level. If this floor is strongly breached, EUR/USD may test 1.0730, followed by the 2020 bottom.
EUR/USD Technical Chart
Apr 14, 2022 10:26