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A Historic Rate Hike Beckons As Pressure Mounts On The ECB

Published 06/06/2022, 03:57 AM
Updated 05/14/2017, 06:45 AM

The U.S. dollar soared after Friday’s nonfarm payrolls report came in better-than-expected with 390k jobs in May. Strong hiring suggests that the Federal Reserve will continue the pace of steep interest rate hikes to combat price pressures.

As for U.S. inflation, the next focus is May consumer prices, due for release on Friday. The European central bank is next in turning the tide from an accommodative monetary policy to a tight monetary policy. The ECB will this Thursday announce an end to bond purchases and will formally begin the countdown to interest rate increases.

Pressure Builds On The ECB

Traders have increased their bets that the European Central Bank will deliver the biggest interest rate increase in two decades at their December or even sooner at their October meeting. What has been elusive just a few months ago will now become a reality. Soaring inflation exerts pressure on policymakers to act sooner rather than later. High inflation, which has surprised policymakers, is proving more persistent than earlier thought.

While the door is not shut for a 50bp move in July, it would be surprising for the ECB to start its hiking cycle with such a big step. Market participants expect quarter-point hikes in July, September, and December, but chances of an earlier half-point rate hike in September or October have grown.

According to ECB President Christine Lagarde, the central bank will end bond purchases in June and hike once in July and once in September, lifting the deposit rate from minus 0.5% up to zero. However, apart from rate hike cycles, the decisive aspect is whether rising inflation can be brought under control by central banks without generating a recession in the end.

We expect higher volatility in the EUR/USD around the risk event on Thursday. For the following days, it will be interesting whether the euro is trading between 1.08 and 1.06. If speculations on bigger ECB rate hikes increase, euro bulls may try to test a break above 1.0810, with the next target at 1.09. If 1.06 breaks, however, to the downside, we expect the pair to drop toward 1.05 in the next move.

EUR/USD: Trading Ideas

  • Long at 1.0740
  • Short at 1.0690

Disclaimer: All trading ideas and expressions of opinion made in the articles are the personal opinion and assumptions of MaiMarFX traders. They are not meant to solicit or recommend buying or selling a specific financial instrument.

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