At the last week’s meeting, ECB reveal its new policy plan, even clearer than expected. ECB plans to hike rates by 25 points in July and start to hiking cycle. In September, Lagarde says that ECB might increase the rate by 25 or more depending on the incoming economic data. With the finishing of the APP (Asset Purchase Program) the meeting was a hawkish one, at least enough for breaking the downtrend we mention in our pre-ECB post. But that wasn’t happening at the moment, EURUSD is testing the earlier dip. So what happened?
Nearly a decade ago, Italy, Spain, Portugal, Greece, and Ireland faced a debt crisis, the EU’s future had become gray, and the bond rates between countries started to widen. Now, with the ending of PEPP and APP, markets are afraid that might happen again with the incoming rate hikes. ECB and Lagarde’s unwillingness to reveal the new tool to prevent fragmentation causes fear at the markets.
Now, with the new topic, the Italy-Germany rate spread is the new chart to look for EURUSD movements. Higher the spread, the more the downward pressure for EURUSD. But this all might be a temporary effect.
EURUSD started to fall in the mid-press meeting, after making a move over to the upper line of the trend channel. The market’s reaction might be a little too much. But the positive surprise for US inflation data and 75 basis point rate hike talks for FED were the icing on the cake. EURUSD fell to the previous dip and tried to hold above the 1.0350.
If EURUSD can hold above the support and sit on the 1.0475 resistance, the upper line of the channel might be targeted again. FED dismissal of the 75-point hikes or ECB’s reveal of the new tool for anti-fragmentation might help this process.
On the other hand, below the 1.0350, EURUSD might extend its fall to the lower line of the trend channel which is currently at 1.0170 and falling.
