The euro has strengthened its position against the dollar and continues to grow amid repeated statements by European politicians this week that the European Central Bank should raise interest rates by another 75 basis points at the next meeting, which is scheduled for October this year. Data on inflation in the eurozone will be released today, which will surely confirm the correct attitude of European politicians to the current situation, it was just necessary to act a little earlier – the Federal Reserve went too far, which led to such a gap in interest rates and a strong weakening of the euro against the US dollar.
In his recent speech, member of the Board of Governors Martins Kazaks stated: "In the current situation, we can still do much more. The next step still needs to be quite large, because we are far from the rates corresponding to 2% inflation. I would support a 75 basis point increase — let's take a bigger step and raise rates."
The Latvian official said that this does not mean that 75 basis points are now the "golden mean", and that, probably, as soon as rates will be more in line with the inflation target, future steps need to be done more carefully. His calls for decisive action are supported by other officials from the Baltic region.
European Central Bank President Christine Lagarde and other officials from the board of governors told us about something similar this week. The surge in prices caused by Russia's military special operation in Ukraine and the resulting energy crisis prompted ECB officials to start raising rates for the first time in more than a decade — this month rates were raised immediately by a historic three-quarters of a point. Now they are weighing how to proceed, as the price increase is accompanied by ever-increasing forecasts of a recession. Lagarde told European Union lawmakers this week that officials will start considering cutting trillions of euros worth of bonds it accumulated during recent crises only after rates reach that point.
Traders estimate the probability of another 75 basis point move next month at 40%. An increase in this amount will double the deposit rate to 1.5% — the highest level since 2009.
As for Kazaks' speech, in his opinion, the cost of borrowing will reach a "neutral" level, which does not stimulate or limit the economy by the end of the year. "Of course, we should discuss all the tools so that when it is necessary to make a tough decision, we are ready," Kazaks said. "The ECB should delay its balance sheet reduction program, or quantitative tightening, until next year." According to the Latvian politician, this will prevent the European crisis from flowing into recession.
Given that the main source of inflation is the crisis in the energy market, which is of a geopolitical and structural nature, an extremely rapid tightening of monetary policy will simply push the economy into recession.
As for the technical picture of EURUSD, the bulls have regained their advantage and the market under their control, which they lost at the beginning of the week, and are now aiming to break through the nearest resistance of 0.9840. It is necessary to do this if they expect the upward correction to continue at the end of this month. A breakdown of 0.9840 will take the trading instrument even higher to the area of 0.9890 and 0.9950. But despite the good upward prospects, protecting the nearest support of 0.9780 is still an important task for the bulls. Its breakthrough will push the euro to a low of 0.9730, but there will be nothing critical in this situation either, since there is the lower boundary of the new ascending channel. Only after missing 0.9730 will it be possible to start getting nervous, as the pair will easily fall into the area of 0.9680 and 0.9640.
The pound continues to win back positions one by one thanks to the support of the Bank of England. Now bulls are focused on the 1.1200 resistance, the breakthrough of which will open up prospects for further recovery in the area of 1.1260 and 1.1320. It will be possible to talk about the return of pressure on the trading instrument only after the bears take control of 1.1070, but this will not cause serious damage to the bull market observed since the middle of the week. Only a breakthrough of 1.1070 will push GBPUSD back to 1.1010 and 1.0950.
