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EUR/USD executes U-turn after Lagarde’s hawkish comments

EUR/USD executes U-turn after Lagarde’s hawkish comments

By Joaquin Monfort

  • EUR/USD recovers after Lagarde says “the game is not over” with inflation. 
  • Slow economic growth and sticky inflation in the Eurozone could weigh on EUR/USD. 
  • Federal Reserve Chairman Powell talks about keeping rates higher for longer, and longer.

EUR/USD is trading in the 1.0680s on Thursday, marginally higher on the day, building on the U-turn it began midweek after touching down at the 1.0601 lows of April. 

It is still too early to say whether EUR/USD is undergoing a correction of the downtrend or a reversal, given the strong bullish recovery so far – of 80 pips in 36 hours – keeps bullish hopes alive. 

EUR/USD rebound gains momentum on smidgin of doubt 

EUR/USD’s rebound got an added boost from comments by European Central Bank President Christine Lagarde, who said at a speech in Washington late on Wednesday that “The game (of fighting inflation) is not over,” despite adding, “Growth in Europe is mediocre, much slower than in the US. We’re clearly seeing timid signs of recovery.” 

Lagarde’s comments contrast a little with those of some of her ECB colleagues who have said inflation is behaving as it should and tracking nicely lower. It introduces a smidgen of doubt into whether the ECB really will start cutting interest rates in June as markets believe. The maintenance of higher interest rates for longer is positive for the Euro as it attracts more inflows of foreign capital.

Her remark about “Growth in Europe is mediocre,” echoes the view of Rabobank FX Strategists, who argue that whilst there is no risk of a “crisis” in the region, “ the combination of slow growth in the Eurozone and nagging budget pressures could lower the defenses of the EUR going forward.” Rabobank suggests a fall to 1.0500 is probable, with risks tilted to the downside. 

EUR/USD pressured by talk of rates for longer in the US

EUR/USD plummeted at the start of April as bets the Federal Reserve (Fed) would cut interest rates in June quickly melted away amidst stickier-than-expected inflation and robust macroeconomic data. 

On Tuesday, Federal Reserve Chairman Jerome Powell said high interest rates would likely be around for longer than previously expected given the little progress being made on inflation in recent months. 

The Fed’s Beige Book, a comprehensive economic survey, on Tuesday repeated the view that little progress had been made on inflation but added that growth and employment were a little stronger than expected.

Everything points to the Fed maintaining interest rates at their relatively high (upper limit of 5.5% for the Fed Funds Rate) levels for a while until the behemoth of inflation is finally slain. 

Indeed, The CME FedWatch tool, a market gauge of the probability of Fed rate cuts, is showing only a 16% probability of a cut in June (from over 70% only a few weeks ago) whilst the odds of a cut by September are now around 70%.   

Technical Analysis: EUR/USD undertakes a youthful recovery

EUR/USD has undergone a volte-face after hitting a floor at 1.0601 on Tuesday (circled). The question now, as most technical questions are, is whether this is a reversal or just a pullback in an ongoing downtrend?

EUR/USD Daily Chart

Momentum has been strong in the short span of the recovery so far, and the Relative Strength Index (RSI) has moved out of oversold, giving a buy signal – another good sign. However, it is too early to draw conclusions. 

The intermediate-term downtrend is probably still in force and in the absence of further proof of a reversal, likely to resume and push the exchange rate lower again. 

Resistance from previous swing lows nearby at around 1.0700 could act as an obstacle to the recovery and see a rotation back down. The level will, in any case, offer technical resistance and provide a rallying point for bears even if their cause is doomed. 

A break below the 1.0601 April lows would post a lower low and indicate a continuation of the downtrend. After that, the next concrete target is at 1.0446, the October 2023 low.

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