ECB Pauses… For Now

On the back of ten consecutive rate hikes, the ECB yesterday paused its tightening program, citing the recent drop in inflation as well as underlying weakness in the eurozone economy. The meeting was a relatively muted event, though was perhaps more on the dovish side than some were expecting.  Lagarde warned that the single market economy was likely to remain weak through the remainder of the year due to the strengthening impact of its recent tightening and noted that the economy was in a completely different place to where it was this time last year.

Inflation Down but Threats Remain

Despite the pause, Lagarde warned that it was “totally premature” to contemplate rate cuts and signalled that further tightening could still be seen if inflation turned higher again. On this front, Lagarde pointed to risks around the conflict in the Middle East and the recent rise in oil prices as the main inflationary threats. With CPI currently around 4% from above 10% a year ago, the bank is clearly confident in bringing prices back to target. However, if current threats develop further and inflation starts to rise again, the market will no doubt begin swiftly repricing its near-term rate projections, reigniting upside EUR risks subsequently.

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Technical Views

EURUSD

The market remains underpinned by the 1.0515 level for now. However, on the back of the prior declines and with momentum studies softening, downside risks are growing. If we break below, 1.0093 is the next support to note. To the topside, bulls need to see a break above the 1.0785 level to alleviate near-term bearishness. 

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