Buy the rumor, sell the fact. This age-old market principle fits the EURUSD more than ever. The euro rose on expectations of Christine Lagarde's aggressive "hawkish" rhetoric in Sintra, Portugal, but after the Frenchwoman's statement about a gradual increase in the deposit rate, it collapsed to 1.05. After some time, history repeated itself: the news about the rise of Spanish inflation to 10% in June became a catalyst for the rally of the main currency pair, but as it moves upward, the number of sellers is growing rapidly.
Investors hoped that after the slowdown in consumer prices in Spain from 9.8% in March to 8.5% in May, the peak was passed. It turned out that everything was just beginning. June's 10% beat all the forecasts of 15 Bloomberg experts, demonstrating the hard work the ECB has to do to get inflation back on target. Will Lagarde's leisurely trek, at the beginning of which the central bank will raise rates by 26 bps, be enough?
Dynamics of European inflation
The most aggressive "hawks" of the Governing Council do not think so. According to Lithuanian Gediminas Simkus, an option with an increase in borrowing costs by 50 bps should be on the table in July. His colleague from Latvia, Martin Kazaks, believes that monetary policy should be tightened fairly quickly and a big step at the next ECB meeting looks reasonable. At the same time, Pierre Wunsch of Belgium said that the increase in the deposit rate by 25 bps in July is a settled issue, and Austrian Robert Holzmann is sure that there are many arguments for such a step and for more.
It seems that the Governing Council expects a serious discussion at the next meeting, but for now, the money markets predict an increase in borrowing costs by 162 bps in 2022. This implies two increases by a shelf and two by a quarter at the four remaining ECB meetings this year. By that time, the federal funds rate may rise to 3.5%, leaving the EURUSD bulls out in the cold.
Yes, the topic of the Fed putting on the brakes in case of clear signs of a recession is actively circulating in the market, but the European Central Bank has much more reason to slow down the process of monetary restriction. Morgan Stanley predicts an economic downturn in the eurozone from Q4 2022 – Q1 2023 amid a reduction in energy supplies. The bank believes that the ECB may stop raising rates after September if the outlook worsens.
Indeed, according to the IEA, a decrease in the volume of gas supplied via the Nord Stream pipeline to Germany will lead to the fact that the level of occupancy of storage facilities will not be 90%, as predicted by the currency bloc, but 75%. The agency recommends now to focus on reducing gas consumption by industry in order to increase storage occupancy.
Technically, there is a downward trend on the EURUSD hourly chart. In such conditions, a rebound from the moving averages should be used to build up previously formed shorts in the direction of 1.048 and 1.046.