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EURUSD bears have tried once again to push the main currency pair beyond the lower boundary of the consolidation range 1.0975–1.1055. The information about the slowdown in European core inflation and the reduction of bank lending volumes in the eurozone served as a trigger for their attack. On paper, this means that the ECB will unequivocally raise the deposit rate by only 25 bps in May. However, before going into battle, sellers of the pair would do well to wait for the Fed's command.
Despite the increase in consumer prices in the currency bloc to 7%, the growth rate of core inflation has decreased from a record high of 5.7% to 5.6% in April. The latter indicator is of crucial importance for the ECB.
European Inflation Dynamics
The euro was pressured by news of more severe bank lending cuts in the eurozone than anticipated. Credit conditions are tightening, and the decline in net demand from borrowers in the first quarter was the fastest since the 2008 global economic crisis.
This circumstance, coupled with the slowdown in core inflation, convinces investors that the maximum the ECB will decide in May is to raise the deposit rate by 25 bps to 3.25%. Nordea believes that new arguments will be needed for the continuation of the monetary policy tightening cycle.
Dynamics of tightening lending conditions in the eurozone
The IMF asserts that high inflation values require the continuation of the ECB's monetary policy tightening cycle, but Christine Lagarde and her colleagues will need flexibility. Ireland advises the European Central Bank to exercise caution.
Thus, the ECB's position is generally clear. Despite the high values of CPI and core inflation, it will reduce the pace of monetary tightening to 25 bps in May. Moreover, the decision will be made after the Fed, so the European regulator will be able to take into account the financial market reaction to Jerome Powell's speech and make adjustments to its accompanying statement.
Credit Agricole believes the FOMC meeting will lead to a stronger U.S. dollar for several reasons. First, the Federal Reserve will keep rates low for a long time, which will play into the hands of the U.S. currency. The futures market still expects a "dovish" reversal in 2023, and it is mistaken. Secondly, investors' fears for the fate of the banking sector, the debt ceiling, and default worsen global risk appetite and increase demand for the dollar as a safe-haven currency. Finally, thirdly, the USD index is currently at the very bottom of the dollar smile, and it has nowhere to go but up.
Technically, the fall of EURUSD below the fair value of 1.097 is good news for the bears, but everything is still uncertain. The pair can either update the local low at 1.095 or return to the upper range of the fair value of 1.097–1.1055. In the first case, we will sell the euro, and in the second one, we will wait for the breakout of the 1.1 pivot point for purchases.
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