What you need to know :: InvestMacro

by ForexTime

Investors and traders around the world are eagerly awaiting today’s European Central Bank policy data.

Here are some key points to look for:

  1. The first rate hike from the European Central Bank since 2011

The European Central Bank is widely expected to raise benchmark interest rates today for the first time since 2011.

What matters now is the size of the height.

Markets are expecting a rise of at least 25 basis points. However, markets are also anticipating a 50% chance of seeing a 50bps larger-than-usual rise today. (no high “two in one”).

This is because the European Central Bank has to play catch-up with record inflation. Europe’s June CPI (used to gauge headline inflation) reached 8.6% in June – more than four times the European Central Bank’s inflation target of 2%.

And with about 80 other central banks around the world already raising their interest rates, it’s time for the European Central Bank to follow suit.

Note: Raising interest rates is the central bank’s main tool for taming high inflation.

  1. Anti-fragmentation tool

    As the European Central Bank raises interest rates and gradually reduces bond buying, investors have been following suit, selling European bonds alongside the central bank. This led to higher European bond yields.

    However, the fear is that “fragmentation” will occur, which means that bond yields in the weaker economies further south (ie Italy) are much higher than bond yields in relatively stronger economies (eg Germany).

    Hence, much higher returns make it more expensive for the government to raise debt (getting money from investors). As the government uses more money to pay interest on the debt it issues, this money will do so Not be available for spending to support its economy.

    Hence, higher revenue for heavily indebted members threatens to undermine the economy; It is the scenario that the European Central Bank is trying to avoid.

    Today, the European Central Bank is expected to announce details of a new instrument to help reduce so-called retail risk.

    Most importantly, the European Central Bank has to convince the markets that this new instrument can indeed achieve its goals.

When is it due?

Alert, it will be later than usual.

  • Policy statement is mandatory in 12:15 PM GMT (30 minutes after previous release times)
  • European Central Bank President Christine Lagarde is scheduled to hold a press conference, starting from 12:45 PM GMT (15 minutes after the previous start times)

How could all this affect the euro currency?

  • If the ECB raises only 25 basis points, it could push the EURUSD back from its recent gains. This may be because the markets believe that the ECB is holding back in the race to combat inflation.
  • If the ECB triggers a larger 50bp rally, this could provide only limited support for EURUSD, given that there are other big concerns when looking at the Eurozone economic outlook (more on that drop further).
  • If the markets Not Convinced that the European Central Bank’s anti-retail tool can do the job, which could further erode sentiment surrounding the euro.
  • If markets are convinced of the effectiveness of this new anti-fragmentation tool, it could help support the Euro’s performance.

Also anticipate a combination of the above scenarios.

Key support and resistance levels for the EURUSD

  • Resistance: The 21-day simple moving average (SMA) is around 1.027.
  • The strongest resistance is due to reach around the 1.035 area, which is shopping the May and June lows.
  • Support: Parity = 1,000 psychologically important marks

To read more: (July 14) Why is EURUSD still below parity… yet?

  • Stronger support may reach last session low at 0.99522.

EURUSD may fall back to parity if ECB disappoints markets

Other major concerns to watch for

  • Political chaos in Italy

Italian Prime Minister Mario Draghi has resigned.

The political crisis in Europe’s third largest economy is a major concern for the European Central Bank as policy makers try to combat record high inflation without much damage to the economy.

This heightened uncertainty has already heightened market fears surrounding Europe’s third-largest economy, prompting investors to sell Italian bonds and send their yields higher today, exacerbating the previously mentioned “retail risks”.

  • Possible energy crisis in Europe.

Russia today returned its gas supplies to Germany via the Nord Stream 1 pipeline.

In the lead up to today, markets were fearful that Russia would decide not to turn the taps on again after the pipeline finished scheduled maintenance.
As I wrote in Last Thursday’s article:

“sSuch a shocking event would spark an energy crisis in Europe, and darken its economic prospects by making a recession almost certain. This could lead to EURUSD surpassing 0.95!

So, son… for now.

However, power supplies are expected to face further constraints, especially as winter approaches. A lack of gas supply could force factories and companies to close operations, which could negatively affect the economy as well.

Coming back to today’s main event, if the ECB seriously disappoints the markets within a few hours from now, we may see in the coming sessions a fresh drop in the EURUSD cycle below parity.

In summary, EURUSD is expected to hold steady in the downtrend it has committed over the past year, with little reason to expect a sustained recovery for the EUR in the near term.

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