Despite the turmoil caused by the release of data on US employment and the labor market, Forex continues to discuss the "hawkish" shift of the European Central Bank. ECB President Christine Lagarde has received a lot of criticism. Allegedly, she went along with a small minority of supporters of monetary tightening, which her predecessor, Mario Draghi, would never have allowed. The European Central Bank is allegedly at risk of making another political mistake, as in 2011, when a debt crisis erupted in the eurozone after raising rates. Whatever it was, the "bulls" on EURUSD saw a red rag in front of their noses, which allowed the euro to resist the pressure of impressive data from the US.

Lagarde's speeches following the February meeting of the Governing Council are more like excuses. First, she said that the ECB intends to act gradually, then she said that a premature tightening of monetary policy could undermine the recovery of the monetary bloc's GDP. Unlike the US economy, the eurozone is far from overheating, so the European Central Bank may not be in a hurry to make decisions. All this, of course, is true, but the situation is now fundamentally different from the one that took place in 2011, when the ECB, by raising rates, provoked a sharp increase in bond yields in the euro area.

Eurozone debt market reaction to ECB monetary tightening

Take, for example, Italy, which seems to be almost a powder keg in the event of the start of the process of monetary restriction. Its public debt-to-GDP ratio has indeed risen from 130% to 150% due to the pandemic, but if we discard all the bonds held by the Eurosystem, it will return to levels seen during the 2012 crisis. Thanks to ultra-low debt rates, Rome pays for them record low amounts. At the same time, according to the analysis of Nordea Markets, even the growth of 7-year yields by 60 basis points will not increase borrowing costs. Italy is now much more prepared to tighten its monetary policy than before.

Of course, the Fed with its 6 or 7 monetary restrictions, which the derivatives market and Goldman Sachs are talking about, looks intimidating. Expectations of a rise in the federal funds rate to 1.75%–2% by the end of 2022 have already triggered a rally in the yield of 10-year US Treasury bonds to the highest level since August 2019. Nevertheless, many bullish factors for the US dollar are already in price. In order to be convinced of this, it is enough to look at the reaction of EURUSD to the American statistics. Wouldn't an unexpected rise in non-agricultural employment of more than 400,000 and inflation of up to 7.5% under normal conditions lead to the capitulation of the bulls? In reality, the market simply sold the fact, and the euro continued to trade near 1.14.

Technically, the Expanding Wedge pattern is still active on the EURUSD daily chart. Point 5 has finally formed, and now the inability of the "bears" to storm the support at 1.1412, 1.136, and 1.1315 will be a sign of their weakness and the basis for buying the pair.

EURUSD, Daily chart