Euro Forecast: EUR/USD Rally More Likely After Traders Ignore Dovish Lagarde


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Fundamental Euro Forecast: Bullish

  • European Central Bank President Christine Lagarde was adamant last Thursday that the markets are wrong to think that the ECB will have to increase Eurozone interest rates as early as next year, arguing that inflation will have eased by then.
  • Yes, inflation will rise further, but price pressures should ease over the course of next year, she said.
  • Yet the market reaction was to price in even more rate hikes by the end of 2022 and in response the Euro climbed, suggesting that it’s ready to break to the upside after the recent period of sideways trading.

Euro Price Ready to Rally Further

The long trend lower in EUR/USD, which took it down from a high at 1.2266 on May 25 to a low at 1.1524 on October 12, looks to be ending, with last week’s price action suggesting that a rally is now on the cards after a couple of weeks of sideways trading.

As expected, the European Central Bank’s policy-setting Governing Council decided Thursday to leave monetary policy unchanged, but the reaction to its President Christine Lagarde’s subsequent news conference was fascinating. She pushed back hard against market pricing suggesting the ECB will increase Eurozone interest rates next year, insisting that above-target inflation will have fallen by then.

Lagarde agreed that it could increase further short-term but insisted that price pressures will ease over the course of the year as factors such as higher energy prices drop out of the equation. Yet, instead of the markets moving to price in easier monetary policy than previously expected, they moved to price in a tightening of policy even earlier than previously predicted.

In response, EUR/USD pushed higher, as shown by the five-minute chart below.

EUR/USD Price Chart, Five-Minute Timeframe (11:00-17:00 BST, October 28, 2021)

Euro Forecast: EUR/USD Rally More Likely After Traders Ignore Dovish Lagarde

Source: IG (You can click on it for a larger image)

For a central bank chief, this is worrying as credibility is important in the role. It also means the ECB may not, as previously expected, signal a move towards reducing its monetary stimulus programs at its December meeting, where new staff economic projections will be available. Nonetheless, Thursday’s advance in EUR/USD gives us an indication that a stronger rally in the pair has now begun after the previous five-month downtrend.

EUR/USD Price Chart, Daily Timeframe (May 21 – October 28, 2021)

Euro Forecast: EUR/USD Rally More Likely After Traders Ignore Dovish Lagarde

Source: IG (You can click on it for a larger image)

Week Ahead: Central Bank Meetings and Payrolls

Turning to the week ahead, the Euro will likely be buffeted by events outside the Eurozone, notably central bank policy decisions in Australia, the US and the UK on Tuesday, Wednesday and Thursday respectively, as well as October US non-farm payrolls data Friday. Eurozone data releases are largely second-tier, including German retail sales, factory order and industrial production, and Eurozone retail sales and unemployment.

Like to know more about EUR/USD and why to trade it? Check out this article here

— Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex





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