Bad Start to 2022 for EUR
EUR has been one of the weakest in the G10 bloc over the year so far. While most of the central banks in the G10 have now embarked on a tightening path aimed at unwinding the massive stimulus put in place across the pandemic, normalising monetary policy, and taming soaring inflation, the ECB has been forced to hold its position. The eurozone has suffered greatly from the Russian invasion of Ukraine and with the bloc already suffering from a host of supply-chain issues linked to Brexit and COVID, the economy has been trailing the sort of performance seen elsewhere. Consequently, the ECB has stuck to a reassuring message of continued support. However, in recent weeks this tone has started to shift .
ECB Hawkishness Starting to Build
There has been a growing call among several ECB members in support of an ECB rate hike in order to help combat spiralling inflation. In the last few days these calls have intensified with ECB’s Nagel, Muller and Rehn each calling for a July rate hike. Additionally, ECB members have signalled that the central bank could outline plans for policy normalisation when it meets next in June.
In light of this shift in tone, traders are clearly now starting to rethink EUR short positions. Meanwhile, Europe asset markets have come under pressure as traders anticipate that higher rates might be coming as soon as this summer in Europe.
ECB Members Calling for Summer Rate Hikes
Speaking with Reuters in an interview today, ECB’s Muller said of the bank’s APP: "We could even discuss if we should end purchases a few weeks earlier. The real issue is interest rate increases and we shouldn’t have much of a delay there either." Muller went on to say: "The recent data confirm that the monetary policy stance is not appropriate given where inflation is and given inflation expectations."
In terms of the pace and scale of rate hikes, Muller noted: "Even if we go by 25 basis point increments, we may get to a positive rate by the end of the year. For the time being, 25 basis points would be an appropriate increment."
Monetary Policy Divergence to Fade
Given that the driving force behind EUR weakness this year has been the divergence in monetary policy (and monetary policy expectations) between the ECB and other central banks, as this divergence starts to erode we can expect EUR short positions to be unwound. With this in mind, there is plenty of room for EUR to rebound in the coming months against a basket of currencies.
Following the latest bounce off the .8296 level, EURGBP has traded firmly higher, breaking through the bearish channel from Q1 2021 highs and above the .8479 level. Price is now paused at the .8597 level. However, with both MACD and RSI bullish, while price holds above the broken trend line and .8479 level, the focus is on a further move higher towards .8659 and .8719 thereafter.