The EUR/USD currency pair sank quite strongly on Friday, once again risking not catching on to the psychologically important level around 1.000. However, more and more European politicians are coming to conclusions and agree that the European Central Bank needs a further increase in interest rates. This is necessary to combat inflation, which, although declining, is quite far from its intended targets.
At the recent spring meeting of the International Monetary Fund, many talked about the sharpest monetary tightening in the history of the ECB nearing completion, a process likely accelerated by bank failures in the U.S. and Switzerland.
However, even though the Fed has acknowledged the threat to the credit sector and economic growth from the recent turmoil, many believe that the eurozone will not suffer much because of it.
For this reason, there is no need to wind down monetary policy tightening measures so soon. The fact that the U.S. has managed to stop the spread of the banking crisis beyond its continent will allow the ECB to fully focus on inflation—especially on the underlying core price pressure, which is almost three times higher than the 2% target and is only gaining momentum.
Belgian central bank governor Pierre Wunsch said last week that the cost of borrowing should be increased further, and at next month's meeting a choice will likely be made between a 25 or 50 basis point step. According to him, another bad core inflation figure, which does not include energy and food costs and is at an all-time high, could tilt the decision toward more rate hikes.
Indeed, the view that the ECB's deposit rate, which currently stands at 3%, could rise even further if we do not see progress in the fight against core inflation in the coming months.
In his recent interview, Bundesbank President Joachim Nagel emphasized that there is still much to do before talking about the end of the high rate cycle. His Lithuanian colleague Gediminas Simkus noted that the ECB is not yet ready to slow down.
Despite the fact that almost no one has yet seriously discussed the size of the next step, there have been those who have made more straightforward statements. Austria's Robert Holzmann, probably the most hawkish of the 26 members of the Board of Governors, said a half-point hike in May was the right decision, focusing on the same core inflation.
Bostjan Vasle of Slovenia believes that it is now difficult to separate the influence of monetary tightening on the banking sector, while the influence of Credit Suisse on bank lending in the eurozone, in his opinion, is insignificant.
His Estonian colleague, Madis Muller, was also optimistic, saying they currently have no reason to assume that the banking shocks in the U.S. and Switzerland will change the outlook for the eurozone. According to him, being vigilant is important, but there is no reason to change the course of monetary policy at the moment.
Investor rates remain closer to a quarter-point hike on May 4, although they have risen in recent days.
For all these reasons, euro bulls still have every chance to continue growing and updating the highs. To do this, it is necessary to stay above 1.0960 and take control of 1.1000. This will allow to go beyond 1.1035. From this level, a rise to 1.1080 is possible. In case of a decline in the trading instrument, only near 1.0960, I expect any action from the large buyers. If there is no one there, it would be nice to wait for an update of the low of 1.0930, or to open long positions from 1.0900.
