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European Central Bank President Christine Lagarde managed to find a compromise between the hawks and the centrists of the Governing Council, as evidenced by the text of the accompanying statement. The ECB intends to start by raising the deposit rate by 25 bps in July, but if the inflation forecast worsens, the speed can be increased. On the other hand, based on its current assessment, the central bank considers it appropriate to gradually but steadily increase borrowing costs. EURUSD initially jumped in response to this wording, but then realized that it had not heard anything new. So, it's not worth rushing to the upside yet.
Buy on rumors, sell on facts. The euro was steadily strengthening ahead of the ECB meeting, from which investors were waiting for a hawkish surprise. German bond yields over the past six months have seen the fastest rally in 100 years, and the chances of aggressive monetary restriction have been growing by leaps and bounds. After the June meeting of the Governing Council, the futures market predicts an increase in the deposit rate by as much as 150 bps. We are talking about its growth by 50 bps at two of the four meetings of Lagarde and her colleagues. The other two will add 25 bp each.
The value of the ECB deposit rate expected by investors
The ECB is expected to worsen forecasts for inflation and eurozone GDP, which increases the risks of stagflation. According to the central bank, consumer price growth at the end of 2022 will be 6.8% against 5.1% in the previous estimate. The economy will expand not by 3.7%, but by 2.8%. At the end of 2024, inflation will continue to stay in the area above the target, which opens the door for a rate hike.
ECB forecasts for European inflation and GDP
Thus, the ECB tried to sell the market the news that it knew well. Even the increase in the deposit rate by 50 bps in September was estimated by investors as fifty-fifty. It is not surprising in such conditions that after taking off to the upper limit of the trading range of 1.065-1.076, EUR USD quotes returned to its middle.
The roller coaster of the main currency pair and the storm on Forex risk being replaced by calm. Traders will closely monitor the release of data on consumer prices in the United States. Unlike CPI, which, according to Bloomberg analysts, will grow at the same pace in May as in April, core inflation will fall below 6%. However, its slow slowdown is unlikely to change the Fed's plan to raise the federal funds rate by 50 bps in June, and then in July, followed by a transition to +25 bps in September. If so, the demand for the US dollar will remain high.
EURUSD, daily chart
EURUSD, hourly chart
Technically, on the EURUSD daily chart, there is an implementation of the "Deception-outlier" pattern. The inability of the bulls to bring quotes above the upper limit of the consolidation range of 1.065-1.076 indicates their weakness and gives rise to short positions. On the hourly time frame, a daughter pattern of the Expanding Wedge has been formed and a mother red pattern is expected to form. Recommendation - use pullbacks to open shorts.
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