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Euro Underestimates ECB’s Hawkish Plans

By Kevin BeckmanMarket OverviewMay 20, 2022 09:55AM ET
Euro Underestimates ECB’s Hawkish Plans
By Kevin Beckman   |  May 20, 2022 09:55AM ET
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The euro rallied amid the dollar’s widespread weakness to briefly exceed the 1.0600 figure for the first time in two weeks. However, the EUR/USD pair failed to preserve the bullish momentum, struggling for direction ahead of the weekend as the greenback steadied after a slide. The common currency still stays marginally above the 20-DMA, which represents the intermediate barrier toward the 1.0500 mark.

The euro remains driven by the overall sentiment surrounding the US currency while shrugging off more hawkish signals from the ECB. The central bank continueы to hint at an impending rate hike, citing elevated inflation, and it looks like the July meeting would be an interesting one.

Markets are now pricing in a 25 bps hike, while a chance of a 50 bps hike is just 12% for the time being. However, should the monetary authorities continue to deliver more aggressive signals in the coming weeks, investor expectations will keep rising. 

It looks like the European currency is underestimating how much the ECB will tighten, suggesting the euro could come off long-term lows in the near to medium term should the Eurozone inflation continue to rise, thus pushing the central bank towards more decisive actions on policy normalization.

On the other hand, the ECB could face a dilemma due to the growing economic risks from geopolitics that exasperates the energy crisis in Europe. Of note, ECB governing council member Visco warned earlier today that the Eurozone might be facing a moderate recession, which could get worse depending on the circumstances.

In the immediate term, EUR/USD could continue to oscillate below 1.0600, with downside risks persisting despite the recent bounce, as the dollar’s uptrend remains intact for the time being.

Euro Underestimates ECB’s Hawkish Plans

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Euro Underestimates ECB’s Hawkish Plans

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