EUR/USD analysis: ECB hikes won't quell parity fears

The European Central Bank raised interest rates by half a percentage point at its July 2022 meeting, the first hike in eleven years, terminating eight years of negative rates and speeding up efforts to return to the medium-term inflation objective of 2%. The ECB also hinted that it will keep raising interest rates at its next meetings, using a data-dependent approach based on how macroeconomic circumstances change.

The decision to raise rates by 50 basis points is a more aggressive step than the ECB predicted at the last meeting, when President Christine Lagarde hinted at a 25 basis point boost.

The announcement caught the market off guard and EUR/USD spiked after the announcement, breaching 1.02 and extending to 1.0277 before meeting stiff resistance and dipping again owards 1.02.

The ECB press conference hinting to a weakening Eurozone economic outlook changed the direction of EUR/USD.

The outlook for the pair continues to be influenced by the rapid deterioration of macroeconomic fundamentals in the euro area, the uncertainty produced by the energy crisis in Europe, and the political crisis that began in Italy after Mario Draghi's resignation.

The ECB's 50 basis point boost is more of a front-loading move than a foreshadowing of a longer hiking cycle due to the Eurozone's mounting recession risks.

During the Q&A session, President Cristine Lagarde stated "we may accelerate the exit, but not the point of arrival." She was alluding to the fact that accelerating the hikes in the near term does not necessarily lead to a higher terminal rate at the conclusion of the hiking cycle.

This was a big letdown for bulls who were wagering that an increasingly hawkish ECB would contain, if not reverse, interest rate differences with the Federal Reserve in the medium term.

Technically speaking, the short-term rebound seen over the last few sessions has lost steam in the last few hours. EUR/USD rebounded from the bottom line of the descending channel, but today faced a strong resistance at 1.027, retracing back to 1.02.

The 14-day RSI stalled and failed to break 50, while the bullish MACD crossing failed to ignite the bulls' enthusiasm.

The European PMIs for July will be released tomorrow. If the indicators were to confirm an already existing slowdown in economic activity, EUR/USD could revert to 1.01 and linger around parity ahead of the Federal Reserve meeting on July 27th.


Idea written by Piero Cingari, forex and commodities analyst at Capital.com
EURUSDeurusdideaeurusdlongeurusdoutlookeurusdpredictionFundamental AnalysisTechnical Indicators

Also on:

Disclaimer