The EURUSD pair showed a serious surge in volatility after the results of the European Central Bank meeting, as well as Christine Lagarde's press conference. As expected, the euro shot up, but failed to settle at the May highs, which led to a sharp sell-off at the time of writing and the removal of quite a large number of stop orders, as is usually the case.
According to the central bank, the ECB will stop large-scale asset purchases in three weeks, which is a key step in the fight against record inflation. Thus, the central bank is preparing the ground for the first interest rate hike in the eurozone in more than a decade.
It is obvious that European politicians were waiting for fresh forecasts and assessments of the economy, frantically worrying about how the Chinese coronavirus and the military special operations of the Russian Federation on the territory of Ukraine would affect all this. Armed with fresh forecasts indicating faster price movements in the eurozone than previously thought, along with a weaker economic recovery after the pandemic, officials agreed to stop net bond purchases from July 1 as part of an anti-crisis program that began in 2015 and lasted for more than 7 years.
As for the rates, no changes were made to them. The deposit rate (currently -0.5%) will be raised by a quarter point next month and again in the fall if inflation requires a tougher stance from the central bank. It is obvious that the decisions taken at the next two meetings will end an eight-year period of low borrowing costs.
Although this was not news to the markets, as Lagarde has been talking about it quite a lot lately, volatility was quite high. "After September, based on the current assessment, the Governing Council expects to resort to a gradual and steady increase in interest rates," the ECB said in a statement.
Let me remind you that, according to the latest data, inflation in the eurozone was 8.1% in May, which is more than four times higher than the target level of 2.0%. Skyrocketing prices are weighing on households across the region, and governments are spending billions of euros to shield people from a spike in energy prices. Incessant inflation is fueling a fierce debate among ECB officials over the size of the July rate hike. I have repeatedly said that quite a lot of politicians insist on considering the possibility of raising the deposit rate by half a point at once.
If Lagarde does not support these goals, then it is obvious that the euro will be under pressure again, since we have not learned anything new, in fact. Investors this week estimated the probability of a half-point rate hike in July as 50/50, as price pressure persists and the economy continues to lose momentum.
For the European currency, bulls need to get above 1.0780, which will lead to a new rapid upward jerk of the pair, to the areas of 1.0820 and 1.0850. There, the bulls will again face quite serious problems, especially given the overbought trading instrument on shorter timeframes. If the euro is under pressure again after the meeting, the bulls will obviously try to do everything to protect 1.0710. If you miss it, most likely, the bears will fail the trading instrument to the lows: 1.0660 and 1.0630.
Pound bulls defended the level of 1.2490, which enabled them to count on continued growth. In the short term, bulls will certainly expect to go beyond 1.2560, which will strengthen the growth of the trading instrument. A breakthrough of 1.2560 will lead to an instant breakthrough to the monthly high of 1.2600 with the prospect of updating 1.2630 and 1.2670. If bulls fail to cope with the tasks assigned to them, and a breakthrough of 1.2490 still takes place, then the pressure on the pound will increase. This will open the way to the lows: 1.2430 and 1.2390. The furthest goal in the current conditions will be the support of 1.2360.
