EUR/USD Soars As Lagarde Talks Up Hikes, Says ECB Will Exit Negative Rates In Q3

EUR/USD soared at the start of the week, rising about 1.1% to 1.0670, supported by improved market sentiment, broad-based U.S. dollar weakness, but more importantly, hawkish comments from the European Central Bank’s President Christine Lagarde.

In recent months, the institution had maintained a non-committal stance on the timing of the withdrawal of accommodation to retain flexibility and optionality and avoid locking itself into a pre-defined course that it might later have to abandon. But all this changed today, a sign that record price pressures are causing the central bank to rethink its approach.

In a blog post, Lagarde sounded alarm bells on inflation and indicated that net purchases under the APP will end very early in the third quarter, but this wasn’t all. She also said that the interest rate lift-off will start in July to allow the bank to exit the eight-year experiment with negative borrowing costs by September. This message suggests that there could be at least two 25 basis point hikes between July and September, considering that the deposit rate stands at -0.50%.

Many traders doubted that the ECB would deliver what futures markets had discounted in terms of tightening, but with Monday’s sharp tone turnaround, it appears likely we will see several interest rate increases and even front-loaded adjustments this year. That said, monetary policy repricing that may occur over the next days and weeks may support the euro, allowing it to stabilize and gain some ground against the greenback.

In the wake of recent events, many investors have come to expect EUR/USD exchange rate parity, but recent developments on the ECB monetary policy front suggest that this scenario may be off the table, at least for now.

EUR/USD Technical Analysis

After Monday's rally, EUR/USD cleared a key hurdle at 1.0642, setting a new monthly high around 1.0691. If sentiment remains positive, buyers could be emboldened and launch an attack on the next resistance, ranging from 1.0760 to 1.0810. On further strength, the focus shifts up to 1.0940. On the flip side, if sellers return and push the exchange lower, support appears at 1.0642, followed by 1.0471, April’s low.

(Click on image to enlarge)

EURUSD technical chart

EUR/USD Chart Prepared Using TradingView

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