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The ECB’s Possible Shift Proves Supportive – By ASC


Basic Forecast for Euro: Neutral

  • The euro stabilized last week when the European Central Bank signaled that it would raise its key interest rates by July.
  • The economic calendar offers several meaningful data releases; a speech by ECB President Christine Lagarde will get the most attention.
  • According to IG Customer Sentiment IndexThe euro has a mostly mixed tendency towards its major counterparts.

Euro Week in Review

The euro experienced a mixed week as the calendar turned in mid-May, but evidence emerged that the worst may have ended in terms of consistent selling that has so far defined 2022. With the European Central Bank signaling that it will raise rates sooner than previously discussed this (more on that below), European bond yields have risen higher, providing a cushion for the besieged Euro. The EUR/USD rate led the pack higher, gaining +1.45%. The EUR/JPY rate handed over most of their gains at the end of the week, but still added +0.35%. Elsewhere, the EUR/GBP rate declined by -0.41% and the EUR/CHF rate declined by -1.20%.

Quieter Eurozone Economic Calendar

While markets – particularly commodities – continue to focus on Russia’s invasion of Ukraine and its impact on the European economy, attention should shift back towards data releases in the coming days, even if there are only a handful of meaningful releases.

Here are the key events next week on the Eurozone economic calendar:

  • On Monday, May 23, there will be a Eurogroup meeting, while the May German Ifo business climate survey will be released at 8 GMT.
  • On Tuesday, May 24, the May French manufacturing and services PMI (flash) will end at 7:15 GMT, followed by the May German manufacturing and services PMI (flash) at 7:30 GMT, then the May Eurozone manufacturing and services PMI ( flash) at 8 GMT. The Ecofin (Council for Economic and Financial Affairs of the European Union) meeting will begin at 8 GMT. ECB President Christine Lagarde will speak at 18 GMT.
  • On Wednesday, May 25, the final 1S’22 German GDP report will be released at 6 GMT. ECB President Lagarde will speak again at 8 GMT.

For full eurozone economy data forecast, see DailyFX economic calendar.

ECB Rate Hike Dragged Forward

How quickly things can change. At their meeting in late April, the European Central Bank suggested that the termination of the stimulus effort in 3Q’22 remained the most likely action, with a follow -up rate hike soon after. But as Russia’s aggression on Ukraine has intensified, inflation has become more entrenched, demanding rethinking by various members of the Governing Council.

Early MayECB President Lagarde said that he would support a 10 basis point rate hike in July, followed by similar comments by ECB Governing Council member Mario Centeno last week. ECB Governing Council member Klaas Knot went a little further, suggesting that a 50-bps rate hike should be on the table.

This means that the gap between the ECB and rate hike expectations has been closed, with the market winning. Now it looks like the ECB will end asset purchases at its next meeting in June, paving the way for policy tightening in July. More importantly, as the ECB has been depressed under inflationary pressures, the market is now predicting that a faster rate of rate hike will occur throughout 2022.

2 -year results of France, Germany, Italy & Spain (May 2020 to May 2022) (Chart 1)

Weekly Base Euro Forecast: ECB Rise Possible Shift Proves Supportive

The main effect of a possible rising ECB rate hike can be seen in the short term of various European government debt yields. There has been a rapid increase in 2 -year yields among the four largest economies in the Eurozone: Italy’s 2 -year yield is at its highest level since December 2018; France’s 2 -year result is at its highest level since April 2014; Spain’s 2 -year results are at their highest level since March 2014; and Germany’s 2 -year yield is at its highest level since October 2011. Rising short -term bond yields should support the Euro; if not lead to more strength, they will at least help curb some of the recent weakness seen throughout 2S’22.

CFTC COT Euro Futures Position (May 2020 to May 2022) (Chart 2)

Weekly Base Euro Forecast: ECB Rise Possible Shift Proves Supportive

Finally, look at the position, according to the CFTC COT for the week ended May 17, speculator increase their net Euro position to 15,804 contrak of 10,572 contracts. The Euro position is now net long for two consecutive weeks, after shifting briefly to net short territory at the beginning of the month.

— Written by Christopher Vecchio, CFA, Senior Strategist

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