Will the euro rise due to the European Central Bank’s bets on raising interest rates? :: InvestMacro

by ForexTime

last weekWe have indicated the possibility of a decline in the US dollar with the escalation of recession fears.

At the time of writing, the benchmark Dollar Index (DXY) is set for a weekly decline, ending a streak of three consecutive weekly gains. The weakening of the greenback has in turn allowed the EUR/USD to re-emerge above 1.05.

The block currency will be in focus in the second half of 2022, amid scheduled data releases and events in the coming week:

Monday 27 June

  • CNH: China has industrial profits
  • US Crude: US weekly crude inventories from the Energy Information Administration (late last thursday)

Tuesday 28th June

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  • Sterling: Speech by Bank of England Deputy Governor Jonathan Cunliffe
  • US Dollar: Speech by San Francisco Fed President Mary Daly; US Consumer Confidence for June

Wednesday 29th June

  • JPY: Japan Retail Sales for May, Consumer Confidence for June
  • Australian dollar: Australian retail sales in May
  • The ECB committee includes European Central Bank President Christine Lagarde, Federal Reserve Chairman Jerome Powell and Bank of England Governor Andrew Bailey.
  • Euro: Eurozone economic confidence; Inflation in Germany in June
  • US Dollar: US GDP for the first quarter (3rd ed.); Speeches by Cleveland Fed President Loretta Meester and St. Louis Fed President James Bullard
  • US Crude: US weekly crude inventories from the Energy Information Administration

Thursday 30 June

  • Japanese yen: Japan has industrial production
  • NZD: New Zealand business confidence for June
  • CNH: China PMIs for June
  • Sterling: UK Gross Domestic Product (GDP) Q1 (final version)
  • Euro: Unemployment in the Eurozone in May
  • Brent: OPEC+ meeting
  • US Dollar: US Weekly Unemployment Claims, Personal Income/Expenditure for May, PCE Contraction Factor for May

Friday 1 July

  • New Zealand Dollar: New Zealand Consumer Confidence for June
  • Australian Dollar: Australia June Manufacturing PMI
  • JPY: Japan Tokyo CPI for June, unemployment rate in May
  • CNH: China Jun Caixin Manufacturing PMI
  • EUR: Eurozone CPI for June and PMI . manufacturing
  • US Dollar: US manufacturing ISM for June, S&P Global Manufacturing PMI for June

Eurozone unemployment and inflation data is set to be interpreted in the context of the European Central Bank’s plans to raise interest rates.

As things stand, the European Central Bank has already informed the markets of its intentions to raise the interest rate by 25 basis points in July. The European Central Bank could then launch a larger 50 basis point increase at its next meeting in September.

These two hikes alone should shut down the ECB’s negative interest rate regime, as markets anticipate a 200 basis point rise between now and March 2023.

However, the European Central Bank may have to charge its rate increases up front, just as the Fed does, if the Eurozone inflation data comes in much higher than expected.

The median estimate for the June CPI reading is 8.3%, a new record for the eurozone, and also higher than the May reading by 8.1% year-on-year.

And if the unemployment rate continues to show resilience, with markets expecting May’s reading to be 10 basis points lower than April’s 6.8% reading, that could pave the way for ECB officials to get fiercer in their battle against record high inflation. !

EURUSD looks to 50-day SMA resistance and 1.035 . support

If this narrative holds and markets up their bets on the more aggressive ECB, it could help EURUSD to retest its 50-day moving average as the immediate resistance level, which is currently hovering around the 1.06 mark.

Otherwise, a drop in EURUSD could bring the 1.035 support area back into focus, after giving the world’s most popular currency pair two opportunities to rebound since May.

aIn general, the EURUSD is expected to continue its downtrend through the 50-day SMA, as it has for the past 12 months.

The euro’s rally remains limited by two main themes:

  • Recession risks continue to obscure the economic outlook for the eurozone, noting that the war between Russia and Ukraine is still raging on the bloc’s eastern border.
  • Retail risks are also weighing on the euro, and the new European Central Bank’s anti-crisis policy tool must be able to convince markets of its effectiveness. Otherwise, the disparity in returns could get out of control and lead to wild declines in the EURUSD.

Of course, the US dollar will have a major say in the performance of the EURUSD. If the prospects of a US recession loom larger, this could translate into more moderation in the US dollar and more comfort for the Euro.

With European Central Bank President Christine Lagarde likely to provide more policy signals along with Fed Chairman Jerome Powell in the middle of the week, this could provide fresh catalysts for EURUSD as we head into July.

However, the European Central Bank must advance its hawkish bets on a market rate hike while keeping retail risks in the region at bay, in order to keep hopes of a euro recovery alive.

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