EUR outperformance begins to sag with a less aggressive ECB

ECB hikes but markets rein in expectations of further increases

• ECB rate hike: A 25bps hike comes with mixed messages 
• EUR outperformance has started to wane: The EUR is positive versus the USD today but outperformance on major forex is now being questioned
• Elsewhere equities are rebounding: European indices are trading higher as US futures rebound overnight following positive results from Apple.
• Metals edge lower, oil with tentative support: In commodities, gold and silver are just cautiously lower this morning, but after recent selling pressure oil is finding a basis of support.

Lagarde tries to talk tough but the ECB looks more cautious now

The ECB has hiked its interest rates corridor by 25 basis points, taking the Deposit Rate to 3.25%.

This was a less aggressive move than the previous 50bps hikes seen in the last three meetings. 

This caution was reflected in the statement which talked about the uncertainty of the impact of the rate hikes.

Governing Council President Christine Lagarde tried to talk tough on inflation in the press conference, but markets are positioning for the ECB coming towards the end of its tightening cycle.

This could begin to weigh on the outperformance of the EUR now.

The mixed messages from the ECB

In the statement, there was a new section that reflected uncertainty and an air of caution:

“the past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain.”

Although a 25bps hike was broadly expected by the market, this hit the EUR. 

Christine Lagarde tried her hardest to talk tough on fighting inflation, with answers in the press conference suggesting this:

“is not a pause”

Also, that there is:

“still more to do”

And that rates are not:

“sufficiently restrictive, yet”

However, markets are still taking this as the ECB beginning to wind down on its tightening. 

Money markets were pricing for the peak rate for the ECB to be around 3.75% before the meeting. This has dropped to 3.65%, meaning a 25bps hike is priced for June, but there is uncertainty beyond that.

The German 2-year yield is a key gauge of the direction of Eurozone rates. The “Shatz” fell sharply yesterday in reaction to the ECB decision. It is slightly higher this morning, but there is a trend lower that has formed.

EUR begins to tail off

So with markets less confident of the ECB rate hikes to come, there is a potential now for the EUR to begin to sag in its performance on major forex.

With the unexpectedly hawkish lean from the Reserve Bank of Australia early this week and the JPY catching a bid from safe haven flows, the EUR is beginning to ebb lower.

The EUR remains stuck rangebound versus the USD as other currencies have rebounded this week. The relative recovery in the NZD and the AUD, along with the JPY rebound are standout moves as the EUR treads water.

EUR crosses are pulling lower

We are seeing the EUR correcting on several of its major crosses in recent sessions. EUR/GBP is edging lower towards a test of the key support at 0.8720/30. However, the key move is being seen in EUR/AUD.

EUR/AUD breaks a key uptrend

The Euro/Aussie cross has been trending decisively higher for the past three months. 

However, this move is now being seriously questioned.

A corrective move has been bubbling under in recent sessions, however yesterday’s “bearish outside day” is a key move that has formed a lower high for the first time during the uptrend.

• Resistance at 1.6785 has been bolstered by yesterday’s failure at 1.6667.
• The three-month uptrend has been broken today.
• The daily RSI is also at its lowest in three months (although it is still currently hanging on above 50).

Reaction to the support at 1.6355 will be key in determining if this move turns into a sustainable correction. A close below the support would be the building blocks of a new negative trend.

Reaction to an intraday rebound will also be key, as another lower high under 1.6667 would add to the growing conviction that the medium-term bull run is over.

Support and resistance levels for Forex, Commodities, and Futures/Indices 

Data: MT5/IXOne

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