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The single European currency is tearing up and rushing, and yesterday's "doves" of the ECB are making titanic efforts to pacify buyers of EURUSD. Philip Lane, chief economist of the European Central Bank, said that the tightening of monetary policy will go gradually, and the increase in the deposit rate by 25 bps in July, and then by the same amount in September, is a kind of benchmark pace. However, when the euro locomotive has already gained momentum, it is very difficult to stop it.
The rise of the main currency pair to 5-week highs was due to the general weakness of the US dollar, as well as the "hawkish" rhetoric of the ECB plenipotentiaries. First, ECB President Christine Lagarde gave food for thought about the imminent start of the process of monetary restriction, announcing the withdrawal of the deposit rate from the negative area by the end of the third quarter, now Lane confirmed her plan. And he did it more specifically than Lagarde, indicating exactly when and how much borrowing costs will increase.
In the interval between the speeches of the head of the ECB and the chief economist, the "hawks" pulled the blanket over themselves. Austria's central bank chief Robert Holzmann insisted on raising the rate by 50 bps at once in July, arguing that any other solution would be weak. His colleague from the Netherlands, Klaas Knot, has made a big step dependent on incoming data. And if the Spanish inflation did not disappoint the EURUSD bulls, soaring from 8.3% to 8.5% in May, the German one managed to stay below 8%. And this circumstance can cool the ardor of euro fans.
Dynamics of Spanish inflation
In my opinion, the upward movement of EURUSD is based on Greed. Investors received good news from the ECB, from China, which is gradually coming out of lockdowns, and from the main US stock indices, which rose by at least 6% by the end of the week by May 28. Improving global risk appetite is calling up the single European currency. Its fans have forgotten that the Governing Council's task is much more difficult than that of the FOMC. In Europe, a significant part of the increase in inflation is due to rising energy prices. Moreover, the process can be accelerated.
The negotiated average wage in Germany fell by 1.8% in the first quarter. The nominal figure rose by 4%, but inflation grew even faster. German trade unions are demanding higher wages, while in the iron and steel industry we are talking about 8.2%.
Dynamics of German inflation and wages
If an increase in labor costs is added to the energy crisis, inflation in the eurozone could jump to 10% or more. In such a situation, the ECB will either have to follow the path of the Bank of England, talking about a balanced approach, or aggressively raise rates. In the first case, the euro will fall; in the second, it most likely will grow.
Technically, the upward movement of EURUSD in the direction of the target at 88.6% according to the Shark pattern and the pivot point at 1.083 continues. A rebound from resistance may be the basis for sales. There is a Three Indians pattern on the hourly chart. A fall below 1.0735 is a reason to open shorts.
EURUSD, Daily chart
EURUSD, Hourly chart
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