ECB Expected to Hike Interest Rates Amid Economic Challenges

According to a Reuters poll, all economists expect the European Central Bank (ECB) to raise interest rates by 25 basis points on July 27. A slight majority of them also anticipate another rate hike in September. The ECB will closely monitor inflation trends in the coming months to avoid excessive rate increases.

Inflation in the euro zone has decreased to 5.5% in June from a peak of 10.6% last October. However, the ECB remains committed to addressing high inflation, stating that it is projected to remain elevated for an extended period. Despite eight consecutive rate increases since July 2022, totaling 400 basis points, there is still debate among investors and analysts about how many more hikes are necessary to achieve the 2% inflation target. The central bank's broadly hawkish stance has also led to expectations that rate cuts are unlikely in the near future.

Regarding core inflation, most economists expect it to be slightly lower than its current level of 6.8% by the end of the year, with a few anticipating a more significant decrease. Wage inflation is considered to be the most persistent component of core inflation, and the unemployment rate is expected to experience only a marginal increase over the next two years.

Despite a slowdown in demand and the euro zone slipping into a recession, with Germany being the primary drag, the region's gross domestic product remained flat in the first quarter of the current year. The survey indicates that the euro zone is projected to grow by 0.2% in each quarter of this year (Q2-Q4) and achieve an average growth rate of 1.0% in 2024.

The euro has strengthened against the dollar by approximately 5% this year, partially due to expectations of narrowing interest rate differentials. While a stronger euro can help lower prices through cheaper imports, inflation is not expected to reach the target until around 2025, aligning with the ECB's projections.

On the other hand, the U.S. dollar strengthened against other currencies after the number of Americans filing new claims for unemployment benefits unexpectedly declined, reaching the lowest level in two months. This development raised expectations that the Federal Reserve might continue hiking interest rates if the economy maintains its strength. The labor market's tightness and declining inflation are contributing to consumer spending, potentially avoiding a recession this year. In addition, data on U.S. existing home sales indicated a drop to a five-month low in June, influenced by a chronic shortage of houses on the market, which slowed the decline in annual house prices.

Nevertheless, the euro is anticipated to maintain a negative outlook in the foreseeable future. This is primarily due to the significant disparity in returns between the two countries and the prevailing robustness of the US economy, which is stronger than perceived. Although there might be occasional improvements in the euro's performance based on economic data and the central bank's policy direction.

Data for Technical Analysis (5H) CFD EUR/USD

Resistance : 1.1137, 1.1141, 1.1146

Support : 1.1127, 1.1123, 1.1118                          

5H Outlook

Source: Investing.com       

Buy/Long 1 If the support at the price range 1.1122 - 1.1127 is touched, but the support at 1.1127 cannot be broken, the TP may be set around 1.1141 and the SL around 1.1118, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.1137 - 1.1142, TP may be set around 1.1150 and SL around 1.1123, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.1137 - 1.1142 is touched, but the resistance at 1.1137 cannot be broken, the TP may be set around 1.1127 and the SL around 1.1146, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.1122 - 1.1127, TP may be set around 1.1115 and SL around 1.1141, or up to the risk appetite.       

Pivot Points Jul 21, 2023 02:26AM GMT

Sources: Investing 1, Investing 2