European Central Bank (ECB) president Christine Lagarde said a first interest-rate increase in more than a decade may follow "weeks" after net bond buying ends early next quarter, joining a growing crowd of policymakers signalling a move as soon as July. "The first rate hike, informed by the ECB's forward guidance on the interest rates, will take place some time after the end of net asset purchases," Lagarde said on Wednesday. "We have not yet precisely defined the notion of 'some time,' but I have been very clear that this could mean a period of only a few weeks," she said in a speech.
Notably, just like the US, the eurozone is facing record inflation, which is almost four times the European Central Bank's target of 2%. Recently Lagarde's ECB colleagues have been increasingly publicly pushing for interest rate hikes at the July 20-21 meeting. The other central banks, such as the Federal Reserve and the Bank of England, have already raised interest rates and will continue to do so.Russia's military special operations in Ukraine have rather seriously increased the possibility of stagflation in Europe. For this reason, the money markets are already taking full account of the ECB's quarter-point hike during the July meeting. For this reason, yesterday's statements by Lagarde had no effect and did not support the European currency which remained in a sideways trading channel, losing ground against the US dollar.Some economists expect that after the hike in July, the next policy change will come as early as September this year. Traders are betting that the deposit rate will peak at 1.5% in around two years, as fears of sustained inflation outweigh fears of a recession.Furthermore, it does not matter whether the increase starts in July or September this year. The big question now is how fast the cycle of interest rate rises will be and when it will end. The baseline scenario from a number of leading economic agencies is that after a rise in September, rates will rise again in December and then increase every quarter.As mentioned above, other European Central Bank officials are also promoting more active policy changes. ECB Executive Board member Frank Elderson said recently that officials can begin looking at raising rates from record lows in July, downplaying the risk of a eurozone recession as Russia's invasion saps growth and stokes prices.Bundesbank chief Joachim Nagel backed a "timely" hike after net bond buying concludes — probably in June, saying the move "could be in July". France's Francois Villeroy de Galhau said he expected rates to be increased gradually "from the summer onwards".German finance minister Christian Lindner said that "we mustn't underestimate the danger of stagflation". The Bundesbank predicts German inflation will come in close to 7% in 2022.As for EUR/USD technical pictureAfter stabilizing at 1.0470, the bulls tried to offer something to the market. However, they failed. Even expectations of a more aggressive policy from the European Central Bank did not help. Geopolitical tensions remain a major threat to the European economy. Given supply chain problems in eurozone countries, all this will further limit the upside potential of risk assets. In the short term, it is better to defend the nearest support at 1.0470. Buyers need to defend this level to stop the bear market. If it misses, the bears are likely to take the instrument to new yearly lows of 1.0420 and 1.0390. A correction in the Euro is possible, but the bulls have to get above 1.0525 first. Only after that, they will aim at the break-up area at 1.0675, where it failed just recently. From there, the upside moves to 1.0640 and 1.0690 are expected.As for GBP/USD technical picturePound buyers don't stand a chance. A weak economy, which is gradually sliding into recession, together with inflation at around 7% will continue to push the pound down as there is no hint of a quick solution to these problems yet. Buyers of risky assets just recently defended 1.2185. However, this is a temporary phenomenon. Now they are trying to come up with something around 1.2245, as only a move outside this range will strengthen the upward correction. Fundamental data can be helpful in this regard. However, as I noted above, they are unlikely to be good. In the short term, I would advise to sell the pound further down the trend in case of upward corrections. A break of 1.2245 would lead to an immediate spurt in the trading instrument to 1.2320 and 1.2400. A break of 1.2185 will strengthen the bear market, which will open the way to new lows of 1.2120 and 1.2070. The furthest target in current conditions would be support at 1.2030, which would be renewed quickly should the UK economy deteriorate.
