European politicians, as well as almost the entire market, are increasingly convinced that the European Central Bank will raise rates next week. However, as you can see on the chart, this is not particularly helpful for the euro.
Traders have already factored in the next quarter point rate hike, and the euro's next growth above the psychological mark of 1.0000 will only occur after several more aggressive rate hikes are planned for the summer months before the ECB takes a break. We will discuss the technical picture of the EURUSD pair in more detail below.
According to Governing Council member Boris Vujcic, the ECB should further increase borrowing costs, as inflationary pressure remains too high. "Inflation is falling, but core inflation is stubbornly high," he said in an interview. "We have no choice but to continue raising interest rates. We will have to do this until we see a change in trend."
As I mentioned earlier, ECB officials are preparing for a monetary policy meeting, and they are expected to choose between raising by a quarter or half a percentage point. Final inflation and bank lending data, to be published two days before the decision, will determine which step they will take.
"Reducing inflation always comes with some costs due to higher interest rates," Vujcic said. "But those costs are lower if we do it decisively now, rather than letting inflation build into expectations. Because in this case interest rates will have to stay higher for longer than if we do it sooner and faster."
His colleague, ECB Chief Economist Philip Lane, recently also noted that the latest economic data increasingly suggest that the European Central Bank should continue raising interest rates. "Current data indicate that we should raise rates again," Lane said in an interview published on Tuesday. "This is still not the right time to stop. Beyond that, it will depend on economic data."
Several more ECB representatives' speeches are expected today, followed by a quiet period on Thursday.
Lane also noted that it would be inappropriate to leave the deposit rate at the current level of 3% and advocated for its further increase. "Inflationary pressures remain in certain sectors of the economy, but are easing in others," Lane said. "I don't think we are in a 1970s-style situation, when inflation was in fact sticky."
The euro reacts sharply to European politicians' remarks. While the demand for risky assets was significant earlier this week, failure to reach monthly highs led to a sharp profit-taking and pressure on the pair. Bulls definitely have a chance to continue growing, but they need to stay above 1.0970 and take control of 1.1005 as soon as possible. Only this will push the euro to new resistance at 1.1030, opening the way to 1.1070. In case the trading instrument falls and a breakthrough of 1.0970, bullish prospects can be dismissed. In this case, I advise postponing long positions until the quote hits 1.0970 or become active only near the next support at 1.0913.
