The euro has posted considerable gains on Thursday. In the European session, EUR/USD is trading at 1.0906, up 0.47% on the day.
Eurozone CPI hits 7.4%
The euro has rebounded nicely as it trades at the 1.09 line. Less than a week ago, EUR/USD broke below a major support line at 1.0800, raising concerns that the currency could continue to fall. Investors have reacted favourably to the March inflation report, which showed a gain of 7.4% YoY (5.9% prior). Inflation has skyrocketed in the eurozone in recent months – in March 2021, the inflation rate was a measly 1.3%.
Despite the sharp rise in inflation, the ECB has adhered to a dovish monetary policy. ECB President Lagarde disappointed the markets when she sidestepped providing any meaningful guidance at the April meeting, which sent the euro lower. Still, there are reports that the ECB is moving in the direction of raising rates in the third quarter of 2022, most likely by 0.25%. On Wednesday, hawkish comments by an ECB member pushed the euro higher. Martins Kazaks, head of the Latvia central bank said that a rate increase was possible in July, adding that he would not challenge market pricing, which has forecast that the ECB’s deposit rate of 0.50% will rise to zero, with a 0.25% increase in September and December.
Talk of one or more rate hikes later this year is bullish for the euro, but there are headwinds that could impede any upward movement. The main obstacle is the war in Ukraine and the issue of sanctions against Russia. As the war continues, there is more pressure on Western Europe to tighten sanctions, but moves such as an embargo on Russian oil will hurt the eurozone economies, which are largely dependent on Russian energy.
- There is resistance at 1.0923 and 1.1008
- 1.0790 is a weak support level. Below, there is support at 1.0705
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