- ECB’s Lagarde says rates to stay restrictive for as long as needed
The euro is unchanged on Tuesday, trading at 1.0593.
Euro slips despite Lagarde’s hawkish remarks
ECB President Lagarde said on Monday that interest rates would be “set at sufficiently restrictive levels for as long as necessary”, adding that the ECB was in a long race in the battle to bring down inflation to the 2% target. Lagarde stated categorically that the Governing Council was not considering rate cuts.
At first glance, Lagarde’s comments appeared hawkish. Investors were less than impressed, however, as the euro fell 0.48% on Monday. Last week, the ECB raised its key interest rate to a record high of 4.0%, but that too failed to support the euro, which lost ground after the decision. Lagarde signalled at the meeting and again in her remarks on Monday that rates may have peaked and investors responded on both occasions with a thumbs-down for the euro.
The ECB’s decision was a close call, with both doves and hawks able to present strong cases. Inflation is running at a 5.3% clip, more than double the target rate of 2%, and last week’s rate hike will help curb inflation. At the same time, eurozone growth has weakened and Germany, the traditional powerhouse, is a glaring weak spot. The global economy is weak and the slowdown in China isn’t helping matters.
Against this background of high inflation and sluggish growth, the ECB opted for a ‘dovish hike’, with the rate statement noting that rates have likely reached the peak level. The euro has reeled off 10 straight losing weeks, declining more than 600 basis points during that period. Unless eurozone data shows an improvement, the downswing could continue.
- EUR/USD is testing resistance at 1.0594. Next, there is resistance at 1.0666
- There is support at 1.0544 and 1.0472
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