EUR/USD Prints New Yearly High on Rate Differentials and Hawkish ECB

EUR/USD News and Analysis

Magnitude of ECB Hike May Depend on EU Lending Survey

ECB policymaker Pierre Wunsch highlighted the urgency for the ECB to continue its rate hiking endeavors while doing more to reduce its massive 3.2 trillion-euro balance sheet.

Wunsch identified a scenario where we could see a 50 bps hike, a proposition that would gain traction should core inflation provide a welcome surprise alongside positive data from the ECB’s quarterly lending survey. With a sense of calm returning to the EU and US banking sectors, markets will turn their focus to the willingness of banks to extend credit during this time of rising interest rates and recent instability as a reduced appetite is essentially an extension of tighter monetary policy even if not directly set into motion by the ECB.

EUR/USD Technical Considerations

EUR/USD has breached the 1.1000 level identified previously and as of the mid-morning London session, trades above the yearly high of 1.1033. The yellow line on the daily chart represents the interest rate differential between the German 10 year bund yield and the US 10 year treasury yield which helps to explain the recent bullish move. The increasing differential continues to support the euro while market expectations of US rate cuts in the second half of the year, and US disinflation, continue to deepen dollar declines.

The 61.8% Fibonacci level of 1.1205 becomes the next upside level of resistance with the next zone of resistance all the way at 1.1500. However, the threat of declining earnings growth ahead of the US earnings season could see some much-needed support for the safe-haven that is the US dollar, as recession fears could make a comeback. Look out for mentions of ‘recession’ in earnings statements particularly as the minutes of the March Fed meeting pointed to the possibility that the US could enter into a recession towards the end of the year. Support rests at the prior high of 1.1033 before 1.0767.

EUR/USD Daily Chart

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